Can Households See into the Future? Survey Evidence from the Netherlands

28 Pages Posted: 1 Nov 2018

See all articles by Baptiste Massenot

Baptiste Massenot

Goethe University Frankfurt - Research Center SAFE

Yuri Pettinicchi

Max Planck Society for the Advancement of the Sciences - Munich Center for the Economics of Aging (MEA)

Date Written: July 14, 2018

Abstract

This paper presents new evidence on the expectation formation process from a Dutch household survey. Households become too optimistic about their future income after their income has improved, consistent with the over-extrapolation of their experience. We show that this effect of experience is persistent and that households over-extrapolate income losses more than income gains. Furthermore, older households over-extrapolate more, suggesting that they did not learn over time to form more accurate expectations. Finally, we study the relationship between expectation errors and consumption. We find that more over-optimistic households intend to consume more and subsequently report higher consumption, even though they do not consume as much as they intended to. These results suggests that overextrapolation hurts consumers and amplify business cycles.

Suggested Citation

Massenot, Baptiste and Pettinicchi, Yuri, Can Households See into the Future? Survey Evidence from the Netherlands (July 14, 2018). SAFE Working Paper No. 233. Available at SSRN: https://ssrn.com/abstract=3276064 or http://dx.doi.org/10.2139/ssrn.3276064

Baptiste Massenot (Contact Author)

Goethe University Frankfurt - Research Center SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Yuri Pettinicchi

Max Planck Society for the Advancement of the Sciences - Munich Center for the Economics of Aging (MEA) ( email )

Amalienstrasse 33
Munich, 80799
Germany
+49-89-38602-301 (Phone)

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