Perceived versus Realized Income Dynamics: Evidence from Subjective Expectations

Henrique S. Basso (), Olympia Bover (), Julio Galvez () and Laura Hospido ()
Additional contact information
Henrique S. Basso: Banco de España and CEMFI, https://www.bde.es/
Julio Galvez: CUNEF University, https://www.cunef.edu/
Laura Hospido: Banco de España, CEMFI, and IZA, https://www.bde.es/

Working Papers from CEMFI

Abstract: Household consumption and saving depend on perceived income risk, yet macroeconomic models typically discipline income processes using realized data. We show that these objects differ systematically. We develop a framework to recover flexible income processes from subjective expectations reported over fixed intervals, accounting for coarse elicitation and focal responses. Households perceive income as more persistent and less dispersed, with weaker state-dependent nonlinear dynamics than realized histories imply. These differences survive adjustments for reporting, measurement error, and horizon differences. In a life-cycle model, they affect precautionary saving and wealth accumulation; when households save according to perceived dynamics but face realized shocks, consumption insurance falls substantially.

Keywords: Subjective expectations; income dynamics; nonlinear persistence; consumption; precautionary saving; life-cycle; panel data. (search for similar items in EconPapers)
JEL-codes: C23 D15 D31 D84 E21 (search for similar items in EconPapers)
Date: 2026-09
New Economics Papers: this item is included in nep-dge
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Working Paper: Perceived versus Realized Income Dynamics: Evidence from Subjective Expectations (2026)
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