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"Overpersistence bias in individual income expectations and its aggregate implications" Filip Rozsypal, Danmarks Nationalbank
Using micro level data, we document a systematic, income-related component in household income forecast errors. These errors can be explained by a modest deviation from rational expectations, where agents overestimate the persistence of their income process. This bias has two effects. First, low income households with this bias are too pessimistic and hence choose to borrow less than their fully rational counterparts even though their borrowing constraint is not binding. This allows a 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.
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September 29, 2017  CSS, Øster Farimagsgade 5, building 26, room 26.1.