Overpersistence Bias in Individual Income Expectations and Its Aggregate Implications

Filip Rozsypal and Kathrin Schlafmann

American Economic Journal: Macroeconomics, 2023, vol. 15, issue 4, 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.

JEL-codes: D84 D91 E21 E62 G51 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (3)

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Working Paper: Overpersistence Bias in Individual Income Expectations and its Aggregate Implications (2017)
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DOI: 10.1257/mac.20190056

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