The downside of being upbeat: Cognitive biases compel consumers to save less and borrow more (with Viet H. Nguyen)
We demonstrate that cognitive biases in expectations compel consumers to save less and borrow more. The four cognitive biases examined here are: confidence (the expectation of positive personal outcomes), optimism (the tendency to be positive about the future), illusion (the expectation of better personal outcomes compared to others) and the self-serving bias (the tendency to view good outcomes as endogenous and bad outcomes as exogenous). Confidence translates into higher borrowing for lower income households, and into lower savings for higher income households. Results are persistent over a person's lifetime and we find little evidence of learning.
Economic news, news heard and consumer behavior (with Viet H. Nguyen)
We investigate the transmission of economic news to consumer behavior. Using `news heard' from the Consumer Attitudes, Sentiments and Expectations (CASiE) survey, the Australian equivalent of the Michigan Survey of Consumers, we can isolate the media effect of news directly rather than inferring its effect from the intensity of news coverage. We match the underlying economic news with favorable and unfavorable news heard in CASiE and examine how news and how news interpreted by the media affect consumption, savings and borrowing behavior.
Monetary policy shocks from the consumer perspective (with Viet H. Nguyen)
How do consumers update their expectations following monetary policy shocks? Using a monthly survey of Australian households, we find that consumers update their expectations on economic activity, unemployment, inflation, family finances and readiness to spend following monetary policy shocks and it takes about one year for shocks to be fully absorbed in expectations. Overall, the updates are consistent with macroeconomic theory but changes in expectations vary considerably when consumer responses are disaggregated by household characteristics. Household heterogeneity also appears to affect policy transmission. In addition, asymmetry in consumer responses to policy tightenings and easings is present across all specifications.