July 30, 2026

In ‘Macroeconomy Without FIRE’, which was awarded a Ministry of Education Academic Research Fund Tier 2 grant from 2025–2029, Assistant Professor Donghai Zhang (NUS Economics) asks a deceptively simple question: do businesses really understand the economy as well as economists assume they do? 

For decades, most economic models have been built on the idea of “full-information rational expectations”—the assumption that all firms, whether a multinational corporation or a neighbourhood bakery, have a clear and accurate picture of how the economy works. Zhang argues that this assumption does not reflect reality. More importantly, it fits Singapore particularly poorly, given the economy’s mix of large global firms and a wide base of small and medium-sized enterprises (SMEs with very different access to information). 

The project starts from an everyday observation: firms do not see everything that is happening in the economy. Many businesses respond to headline signals such as inflation but struggle to interpret what those signals mean for jobs, wages, and future demand. Zhang’s research shows that firms often react too strongly to news about rising prices, while reacting too weakly to changes in employment. This suggests that many businesses misunderstand the relationship between inflation and economic activity—a relationship that lies at the heart of monetary policy. 

This matters for Singapore because managing inflation expectations is central to how the Monetary Authority of Singapore (MAS) stabilises the economy. If firms misread inflation signals or misunderstand where price pressures come from—especially in a small, open economy heavily exposed to global supply shocks—policy messages may not land as intended. Inflation can then persist longer, and economic adjustments can become more uneven across sectors. 

A key insight of the project is that these misunderstandings are not simply due to carelessness or poor judgement. Instead, they reflect the limits of attention and information. Large firms can afford teams of analysts, consultants, and forecasting tools. Smaller firms cannot. As a result, businesses differ systematically in how closely they follow economic developments and how they respond to policy signals. 

Zhang’s research shows that these differences matter not just for individual firms, but for the general economy. When smaller firms are slow to respond to changing conditions, their behaviour can influence larger firms as well—through competition, pricing, and supply chains. Even well-informed firms may hesitate to adjust prices or investment if they know their competitors are lagging. In this way, gaps in information can spread across the economy. 

Beyond its academic contribution, Macroeconomy Without FIRE speaks directly to Singapore’s policy challenges. It suggests that effective economic management depends not only on sound policy design, but also on how clearly policies are understood by different types of firms. Models that assume perfect understanding may overlook why policies sometimes work more slowly—or unevenly—than expected. 

Overall, this project positions Singapore as a place where new ways of thinking about the economy can emerge—ones that better reflect how real businesses operate under uncertainty. By grounding macroeconomic theory in everyday limits on information and attention, Zhang’s work offers a more realistic foundation for understanding inflation, business behaviour, and economic stability in Singapore.