American Economic Journal:
Macroeconomics
ISSN 1945-7707 (Print) | ISSN 1945-7715 (Online)
Overpersistence Bias in Individual Income Expectations and Its Aggregate Implications
American Economic Journal: Macroeconomics
(pp. 331–71)
Abstract
Using microlevel data, we document systematic forecast errors in household income expectations that are related to the level of income. We show that these errors can be formalized by a modest deviation from rational expectations, where agents overestimate the persistence of their income process. We then investigate the implications of these distortions on consumption and savings behavior and find two effects. First, these distortions allow an otherwise fully optimization-based quantitative model to match the joint distribution of liquid assets and income. Second, the bias alters the distribution of marginal propensities to consume which makes government stimulus policies less effective.Citation
Rozsypal, Filip, and Kathrin Schlafmann. 2023. "Overpersistence Bias in Individual Income Expectations and Its Aggregate Implications." American Economic Journal: Macroeconomics 15 (4): 331–71. DOI: 10.1257/mac.20190056Additional Materials
JEL Classification
- D84 Expectations; Speculations
- E21 Macroeconomics: Consumption; Saving; Wealth
- D91 Micro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
- E62 Fiscal Policy
- G51 Household Finance: Household Saving, Borrowing, Debt, and Wealth