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Beliefs About the Economy are Excessively Sensitive to Household-Level Shocks: Evidence from the Danish Registry

Dmitry Taubinsky - University of California, Berkeley
Mon, Nov 27 2023, 3:45pm - 5:00pm PST
Lucas A - Landau 1st Floor

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Co-authors: Luigi Butera, Chen Lian, and Matteo Saccaraloa

Using a novel link between the Danish registry and survey-elicited beliefs about the economy, we examine how households' beliefs about the economy evolve with household-level shocks. We develop formal tests of limited-information rational-expectations, and find stark deviations from this Bayesian benchmark. We find that households' inflation forecasts are associated too strongly with recent changes in household income, as well as expected future changes. Moreover, households' recollections of past inflation (“backcasts”) are also too strongly associated with recent and expected future changes. Our findings are most consistent with "affective updating": good news make people broadly optimistic, and bad news make people broadly pessimistic.