Do emotions affect economic behaviour? Employing unit record data from two population-level surveys, we use self-reported financial stress and mental distress to identify negative emotions and use current and expected spending to capture consumption behaviour. We identify two transmission channels of negative emotions, one predicted by economists and one predicted by psychologists. We find that the psychology transmission channel dominates when budget constraints are not binding. As a coping mechanism, consumers increase consumption to regulate the negative emotions caused by stress. In contrast, negative emotions identified as the autonomous component in consumer sentiment lead to a decline in consumption. These findings are in line with appraisal models of emotions where the behavioural impact of emotions is not driven by their valence (pleasantness) but by their antecedent appraisals (perceived causes).

 

This paper compares consumer inflation and wage expectations. We use the example of Australia, a long term inflation targeter with wage expectations data since 1997. Results suggest that the global financial crisis (GFC) was a 'hot stove' event that scarred workers. Inflation expectations are firmly anchored while nominal wage expectations are not and have been declining since the early 2010's, leading to expected declines in real wages. The GFC and the subsequent economic slow-down rendered the possibility of a job loss salient for many workers which impacted workers' wage expectations formation and has led to a more pessimistic outlook on wages. This scarring (or 'experience based learning') decreased the pass-through of inflation expectations to wages post GFC. These results fit neatly with weak actual pass-through from price to wage inflation observed in the US.

 

(abstract and paper coming soon)

 

Communicating probabilistic information (with Markus Hahn, Australian National University, Shaun Vahey, Warwick University)