Working Papers

Abstract: This paper investigates how carbon tax aversion impacts the macroeconomy. Through an analysis of carbon tax announcements in Alberta, we first provide empirical evidence that carbon taxes result in the formation of pessimistic macroeconomic beliefs, characterised by higher inflation expectations and lower expected real income. We term these beliefs as carbon tax aversion in the macroeconomy and incorporate them into a two-sector New Keynesian model that departs from the standard assumption of rational expectations. From our benchmark model, we find that carbon tax aversion exacerbates output losses but stabilizes aggregate prices after carbon tax announcements. With carbon tax aversion, the announcement of a 1% increase in carbon taxes results in larger output losses by 0.3% but smaller decrease in aggregate prices by 0.02%, relative to the rational expectations model. Furthermore, earlier announcements result in lower output losses. Our findings highlight the importance of managing pessimistic beliefs against carbon taxes and the role of central banks in supporting the green transition.

Abstract: Using micro-level administrative data from India, we show the consumption and portfolio rebalancing response of households to changes in interest rate. Exploiting variation in the timing of expiry of term deposits, we find that when interest rate falls, households increase consumption by 6 percent and increase their fraction of wealth into risky assets by 36 percent after the expiry of term deposits. While both existing and new investors “reach for income” by investing in high dividend stocks, new investors also “reach for yield” by investing in high beta and more volatile stocks. The effects on consumption and risky investment are smaller for term depositors with automatic renewal. Households with more liquid wealth have a smaller consumption effect but a larger portfolio rebalancing effect on risky investment. These results highlight that term deposits contract rigidity and household wealth affects the monetary policy pass-through.

Abstract: We examine how investors respond to firms' carbon offset strategies in voluntary carbon markets. Following the retirement of carbon offsets, we find a positive market reaction, with a cumulative abnormal return of 1.1% over 15 trading days. The market response is driven by the quality of offsets rather than their quantity. High-quality offsets, such as removal offsets and recent vintages, generate positive stock market reactions, while the quantity of offsets retired has no significant effect. Additionally, we find that during periods of abnormal temperature changes, which heighten the salience of climate-related actions, firms are more likely to increase high-quality offset retirements. Our results are consistent with a signaling framework, where high-quality offsets serve as credible signals of a firm's genuine commitment to sustainability.

Abstract: This paper exploits a natural experiment in India – Inflation Targeting to study how changes in inflation expectations influence households’ consumption and portfolio choices. Using regional heterogeneity in inflation expectations due to the Inflation Targeting policy, we find that households with high liquid wealth decreased consumption and increased savings when faced with a fall in inflation expectations. Moreover, they rebalanced their portfolio from risky investments towards bank deposits. This is attributed to the nominal rigidity of savings deposit rate. In comparison, households with low liquid wealth consume more and save less as inflation expectations fell. Our findings provide direct evidence on how the transmission of inflation expectations through different economic channels is influenced by the household balance sheet.

Abstract:. We examine how households respond to heat when making health insurance decisions. Using administrative data from major insurers covering 70 percent of China's health insurance market, we show that a one-degree Celsius increase in purchaseday temperature raises uptake of critical illness insurance by 0.55 percent, and by 5.5 percent on extreme heat days. These effects fade quickly, with cancellations rising as temperatures cool. On hot days, households are also more likely to choose single-premium contracts, consistent with a commitment motive. Our findings support salience bias, as heat amplifies attention and shifts demand toward severe-risk products without affecting claims.

Abstract: This paper examines how price-based learning with misperception of policy effects influences the conduct of macroprudential policy. We show that distorted beliefs, reflected in overoptimism, arise endogenously from policy interventions when agents mistakenly attribute policy-driven price movements to changes in fundamentals. As a result, beliefs about the aggregate state are updated incorrectly even when underlying fundamentals remain unchanged. Embedding this mechanism in a standard open-economy framework, we find that when regulators fail to internalize how their policies affect prices and beliefs, intervention can yield lower welfare than non-intervention. The optimal policy adjustments depend on whether price-based mislearning amplifies or offsets the intended effects of regulation.

Abstract: We examine the effects of mobility on fertility using Taiwan's high-speed rail (HSR) introduction in a quasi-natural experiment. Using the Taiwanese Panel Study of Family Dynamics data and a difference-indifferences design, we find that the HSR increases birth rates by 6.5% among geographically separated couples relative to those living in the same city. The effects are larger on women with long commutes and men working in high housing-cost cities. Transportation infrastructure shapes family formation by easing geographic constraints and reducing travel time. The HSR strengthens household bonds and lowers barriers to childbearing by enabling families to meet more frequently.

Abstract: We propose a theory of international uncertainty contagion in a two-country model with non-rivalrous news production. In each country, information acquisition occurs through news production and is allocated between a global aggregate process and a country-specific idiosyncratic process. Because aggregate news is non-rivalrous and can be reproduced across countries, one country’s information choices generate externalities for the other. When uncertainty about the foreign idiosyncratic process rises, these cross-border informational externalities induce strategic substitutability: the foreign country reallocates news production toward its country-specific process, while the domestic country shifts toward aggregate news. This raises posterior uncertainty about domestic conditions in both countries, resulting in international uncertainty contagion. The effect is stronger under high aggregate uncertainty, when reliance on reproduced foreign aggregate news is greater. Embedded in a two-country RBC model, our mechanism can reduce the output divergence typically generated by country-specific shocks and generate stronger cross-country output comovement. It also provides a complementary channel for risk-off-type dynamics, in which currency depreciations and capital outflows in riskier countries arise from country-specific rather than global shocks.

Abstract: Using both experimental and brokerage administrative data, we document a behavioral pattern in which investors are more likely to engage in within-category rather than cross-category portfolio rebalancing. In our laboratory experiment, subjects are presented with two categories of assets: risk-free and risky. We find that changes in social concerns related to one of the risky assets prompt subjects to rebalance their investments within the risky category, without affecting their risk-free holdings. This pattern is further supported by trade-level administrative data from a financial brokerage firm, where there is active trading in risky assets alongside relatively stable holdings of safe assets. Among risky investments, we find that investors show a tendency to trade within specific categories, such as socially responsible mutual funds. A possible mechanism is that investors simplify the complex global optimization problem by focusing on within-category portfolio rebalancing, which is consistent with notions of categorical thinking and narrow bracketing.