Beliefs About the Economy are Excessively Sensitive to Household-Level Shocks: Evidence from Linked Survey and Administrative Data

Dmitry Taubinsky, Luigi Butera, Matteo Saccarola and Chen Lian

No 32664, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study how people's beliefs about the economy covary with household-level events, utilizing a unique link between Danish administrative data and a large-scale survey of consumer expectations. We find that compared to actual inflation, people's inflation forecasts covary much more strongly (and negatively) with both recently realized household income changes and measures of expected future household income changes. We formally establish that these findings are stark deviations from the Bayesian limited-information rational expectations (LIRE) benchmark. Similar results hold for perceptions of past inflation ("backcasts"), suggesting that imperfect recall is a key mechanism for biased forecasts. Building on this, a series of additional tests, some of which utilize data on adverse health events, suggests that the forecast biases are at least partly due to selective recall cued by affective associations. That is, negative (positive) household-level events cue negative (positive) recollections, which lead to pessimistic (optimistic) forecasts.

JEL-codes: D90 E0 E7 G0 G5 H31 (search for similar items in EconPapers)
Date: 2024-07
Note: EFG ME PE
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