Working Paper: Overpersistence Bias in Individual Income Expectations and its Aggregate Implications
Working Paper - April 2021 - No. 173
Using micro-level data, we document a systematic income-related component in household income forecasting errors. We show that this bias can be formalized by a modest deviation from rational expectations, where agents overestimate the persistence of their income process. The bias alters the distribution of marginal propensities to consume which makes government stimulus policies less effective.