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Subjective Income Expectations and Household Debt Cycles

Author

Listed:
  • Francesco D’Acunto
  • Michael Weber
  • Xiao Yin

Abstract

Matched transaction-level, credit-registry, and survey-based data reveal that consumers on average form excessively high (low) income expectations relative to ex-post realizations after unexpected positive (negative) income shocks. These extrapolative income expectations lead consumers to increase current spending, accumulate more debt, and face more defaults when lower-than-expected incomes are realized. We assess the aggregate implications by estimating a consumption model with defaultable unsecured debt and diagnostic Kalman filtering whereby consumers over-extrapolate income shocks when forming expectations. Extrapolative income expectations help explain state-dependent household debt cycles qualitatively and quantitatively.

Suggested Citation

  • Francesco D’Acunto & Michael Weber & Xiao Yin, 2024. "Subjective Income Expectations and Household Debt Cycles," NBER Working Papers 32715, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:32715
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    More about this item

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E71 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on the Macro Economy
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth

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