Evidence on Expectations of Household Finances

Cocco, João F., Francisco Gomes and Paula Lopes-Cocco

No 17447, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We use panel data on expected and realized changes in household finances to study the process of expectation formation and expectation errors. Households extrapolate from improvements in financial situation, but a deterioration in their finances is associated with an increased dispersion of forecasts. This increased dispersion leads to higher probabilities of both negative and positive forecast errors. Individuals who expect negative earnings shocks to revert too quickly save less and have a higher likelihood of being financially worse off again in the future. A calibrated life-cycle model quantifies the consumption smoothing and welfare implications of belief distortions.

JEL-codes: D84 G40 G50 (search for similar items in EconPapers)
Date: 2022-07
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