Can households see into the future? Survey evidence from the Netherlands

Baptiste Massenot and Yuri Pettinicchi

No 233, SAFE Working Paper Series from Leibniz Institute for Financial Research SAFE

Abstract: This paper presents new evidence on the expectation formation process from a Dutch household survey. Households become too optimistic about their future income after their income has improved, consistent with the over-extrapolation of their experience. We show that this effect of experience is persistent and that households over-extrapolate income losses more than income gains. Furthermore, older households over-extrapolate more, suggesting that they did not learn over time to form more accurate expectations. Finally, we study the relationship between expectation errors and consumption. We find that more over-optimistic households intend to consume more and subsequently report higher consumption, even though they do not consume as much as they intended to. These results suggests that overextrapolation hurts consumers and amplify business cycles.

Date: 2018
New Economics Papers: this item is included in nep-eur
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Citations: View citations in EconPapers (17)

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Journal Article: Can households see into the future? Survey evidence from the Netherlands (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:safewp:233

DOI: 10.2139/ssrn.3276064

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