Description:

Chen Lian (UC Berkeley): "Beliefs about the Economy are Excessively Sensitive to Household-level Shocks:Evidence from the Danish Registry" with Luigi Butera, Matteo Saccarola, and Dmitry Taubinsky

Abstract: By linking the Danish registry to a survey of consumer expectations, we examine how people's beliefs about the economy covary with household-level events. We develop formal tests of limited-information rational-expectations (LIRE) and find stark deviations from this Bayesian benchmark. People's inflation forecasts covary too strongly (and negatively) with both recently realized household income changes and measures of expected future household income changes. Similar results hold for recollections of past inflation (“backcasts”). A series of additional tests suggests that selective recall cued by household-level events is a key mediator for people's forecast biases.