Debt and Financial Expectations: An Individual- and Household-Level Analysis

21 Pages Posted: 5 Jun 2006

See all articles by Sarah Brown

Sarah Brown

University of Sheffield - Department of Economics; IZA Institute of Labor Economics

Gaia Garino

University of Leicester - Department of Economics

Karl Taylor

University of Sheffield - Department of Economics

Stephen Wheatley Price

University of Leicester - Department of Economics; IZA Institute of Labor Economics

Abstract

In this article we show that optimistic financial expectations impact positively on both the quantity of debt and the growth in debt at the individual and household levels. Our theoretical model shows that this association is predicted under a variety of plausible scenarios. In the empirical analysis we explore the determinants of debt and of growth in debt using British data. We find convincing support for our theoretical priors and show that it is optimistic financial expectations per se that are important in influencing debt, rather than the accuracy of individuals` predictions regarding their future financial situation. (JEL D18, D84, D91)

Suggested Citation

Brown, Sarah and Garino, Gaia and Taylor, Karl B. and Wheatley Price, Stephen, Debt and Financial Expectations: An Individual- and Household-Level Analysis. Economic Inquiry, Vol. 43, Issue 1, pp. 100-120, 2005. Available at SSRN: https://ssrn.com/abstract=906222

Sarah Brown (Contact Author)

University of Sheffield - Department of Economics

9 Mappin Street
Sheffield, S1 4DT
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Gaia Garino

University of Leicester - Department of Economics ( email )

Department of Economics
Leicester LE1 7RH, Leicestershire LE1 7RH
United Kingdom

Karl B. Taylor

University of Sheffield - Department of Economics ( email )

9 Mappin Street
Sheffield, S1 4DT
United Kingdom

Stephen Wheatley Price

University of Leicester - Department of Economics ( email )

New Building 325
Leicester LE1 7RH
United Kingdom
+0116 252 5645 (Phone)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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