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Household Financial Decision-Making and Macroeconomic Fluctuations

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  • Xiang Deng
  • Xiang Cheng
  • Zhiming Fu

Abstract

This paper introduces household financial decision-making process into the classic financial intermediation model, which allows us to study the impact of households’ portfolio choice on the behavior of financial intermediation and the real economy. Our numerical results show that the incorporation of household financial decision helps stabilize the aggregate economy through the following channel. A negative shock of capital quality reduces the total assets of financial intermediaries and tightens their lending to enterprises. This leads to a decline in social investment and output. Then, the household responds to this by changing their asset composition, which alleviates the impact of the negative shock and thus stabilize the economy.

Suggested Citation

  • Xiang Deng & Xiang Cheng & Zhiming Fu, 2021. "Household Financial Decision-Making and Macroeconomic Fluctuations," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 57(14), pages 4143-4165, November.
    • Handle: RePEc:mes:emfitr:v:57:y:2021:i:14:p:4143-4165
    DOI: 10.1080/1540496X.2019.1710128
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