The downside of being upbeat: The effects of consumer optimism on real economic activity (with Viet H. Nguyen, University of Melbourne)
Using a quarterly consumer expectations survey, we propose two novel measures of consumer optimism, ex ante optimism and ex post optimism. We demonstrate empirically that excessive optimism about future family finances impacts the real economy. The excessive optimism (ex ante optimism) compels consumers to save less and borrow more, putting upward pressure on consumption growth. When family finances improve persistently less than expected (ex post optimism), consumers cut back on credit and save more which puts downward pressure on consumption growth. This saving and borrowing channel of the optimism bias is robust to age and income. (Working Paper)
Do optimistic consumers cause unemployment? Dissonance in consumer expectations (with Viet H. Nguyen, University of Melbourne)
The paper explores whether consumers form consistent forecasts for inflation and nominal wage growth and how this dissonance in expectations impacts actual labour market outcomes. Consumer expectations for inflation and for nominal wage growth may not be as consistent as economists perhaps expect. Claus and Nguyen (2018) find evidence that consumers forecast, at least in part, inflation and unemployment as independent processes which may lead to inflation expectations that are not consistent with the expected strength of the labour market and of the economy. Utilising the wage expectations module of the Consumer Attitudes, Sentiments and Expectations (CASiE) survey, we calculate expected real wage growth from expected nominal wage growth and inflation expectations. We examine how this implied expected real wage growth aligns with actual labour market conditions. Respondents are disaggregated by age to explore if optimistic expectations on wage growth, particularly by young respondents, impact actual unemployment outcomes.
The transmission of financial stress to the Antipodes (with Sandra Eickmeier, Deutsche Bundesbank and Sabine Tanneberger, Deutsche Bundesbank)
Applying a global dynamic factor model shows that global financial stress puts downward pressure on economic activity in the Antipodes, where the negative impact is felt throughout the economies. While financial stress in emerging Asia has similar effects on New Zealand, it puts upward on economic activity in Australia. Results suggest that Australian banks may shift from lending abroad to lending at home putting upward pressure on consumption and house price in Australia. Perhaps as expected, global financial stress puts downward pressure on commodity prices while the effect of financial stress in emerging Asia is small.
Open Economy Macro Modelling
Tracing foreign shocks to regional economic actvity (with Robert Lamy, The Forecasting Advisor)
The paper demonstrates that regional indexes of activity provide a simple and convenient tool to identify differences in the evolution and drivers of regional economic activity. We construct indexes of activity for ten Canadian provinces. Applying the indexes in a broader context by using a structural vector autoregression (SVAR) approach allows us to analyse the effects of shocks from the US and from China on regional economic activity. This Index-SVAR approach facilitates a rich analysis because impulse responses can be traced back to index components.