Working Paper: Overpersistence Bias in Individual Income Expectations and its Aggregate Implications

Working Paper - April 2021 - No. 173

Authors Rozsypal, Filip (Danmarks Nationalbank); Schlafmann, Kathrin (Copenhagen Business School)
Subject household balance sheets
Type Working paper
Year 2021
Published 7 April 2021
Abstract icon 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.