who withdraws housing equity and why the decision to extract home equity is examined using household level data for the uk over 1993 2003 at its peak during the period around 1 in 10 homeowners withdraw equity per year little is known about this financial decision i find that the equity withdrawal decision conforms to predictions from the standard life cycle framework and models that predict its use as a financial buffer the paper also estimates responses to the large house price appreciation and significant reductions in mortgage rates seen during the period

unanticipated aggregate disturbances and tests of the life cycle consumption model several recent studies have used data on food consumption from the panel study of income dynamics psid to test t he rational expectations life cycle hypothesis against the alternative of prevalent liquidity constraints these tests invoke the rational expectations restriction that income forecast errors are independent of lagged information this restriction however applies only in a time series context it is possible that unanticipated macroeconomic disturbances cause forecast errors to be correlated with lagged information in a cross section of families the authors present evidence of such a correlation in the psid data show that this correlation biases previous tests of the life cycle model toward rejection and derive a proper test of the life cycle model using pa nel data copyright 1993 by mit press

nonlinear pricing to produce information we investigate the firm s dynamic nonlinear pricing problem when facing consumers whose tastes vary according to a scalar index we relax the standard assumption that the firm knows the distribution of this index in general the firm should determine its marginal price schedule as if it were myopic and produce information by lowering the price schedule bunching consumers at positive purchase levels should be avoided as a special case we also consider a market characterized by homogeneous consumers with a static but unknown demand curve we show that when there are repeat purchases the forward looking firm should tend towards penetration pricing otherwise its strategy should tend towards skimming we extend our insights to more general settings and discuss implications for pricing product lines

are investment expectations rational adaptive or regressive i introduction tests of the rational expectations hypothesis reh outside the experimental laboratory typically utilize two types of data quantitative measures of expectations about publicly observed variables such as inflation usually elicited from small samples of professional forecasters and qualitative measures of expectations about privately observed variables such as personal income elicited from large samples of households analyses of both types of data have produced varying levels of support for the reh for example keane and runkle 1990 1998 find evidence in favor of the reh using the first type of data while bonham and cohen 2001 in part overturn their results after accounting for the nature of cross correlations inherent in a group of individuals forecasting the same publicly observed integrated time series next using household survey data das and van soest 1997 1999 and das et al 1999 find evidence against the reh in contrast benitez silva et al 2008 furthered the econometric analysis of such data and presented evidence in favor of the reh in employing publicly available professional forecaster data several concerns related to pooling data revisions and the possibility of signaling on the part of forecasters have been raised 1 further pesaran and weale 2006 review a large and growing literature on survey expectations of households and the attendant econometric and substantive issues in analyzing qualitative response expectations data from such surveys they conclude for myriad reasons that it remains the case that the analysis of individual responses to such surveys and in particular to those who collect only qualitative information is underdeveloped these issues can be addressed in part by data on quantitative expectations about privately observed variables this paper employs data from two new survey sources that provide such information the resulting panel of 775 firms in canada contains quantitative information on expectations about purchases of new machinery and equipment investment as well as realized levels of investment over 7 yr the data are particularly useful because they avoid some of the issues raised for previous studies and their analysis helps to contribute on the firm side to the agenda laid out by manski 2004 who sees a critical need for basic research on expectations formation figure 1 omitted estimation results suggest that investment expectations are not rational if the assumed underlying loss function is assumed to be symmetric that is the usual unbiasedness and efficiency requirements for rational expectations clearly elucidated for instance by lovell 1986 do not hold for the collected data further hypothesis tests on statistical models implied by conventional adaptive expectations do not suggest the prevalence of such behavior in the data however a particular version of such extrapolative expectations namely regressive expectations formation does find support in the data the paper is structured as follows section ii discusses the data on 775 manufacturing plants over 7 yr that was compiled by merging two national surveys in canada in section iii the statistical models and attendant hypothesis tests as implied by various expectations formation assumptions are described followed by their estimation results section v concludes ii the data data were compiled from two confidential proprietary surveys conducted by statistics canada the capital expenditures survey ces and the annual survey of manufactures asm over 7 yr 1986 1992 2 the ces contains data on one step ahead expected expect sub it and realized actualit capital expenditures on machinery and equipment i e investment and the asm on shipments shipment sub sit 3 owing to the lumpy and long term nature of construction expenditures this variable was excluded finally only manufacturing sector records were selected for both surveys

models of inflation expectations formation a comparison of household and economist forecasts the recent appreciation of the critical role played by expectations of inflation in the behavior of macromodels has stimulated empirical studies of the formation of expectations by different groups time series survey data on expectations of inflation exist now for economists households and businesses these data have been used as independent variables in explaining wage behavior gordon 16 turnovsky and wachter 34 and de menil and bhatta 5 prices turnovsky and wachter 34 and wachtel 36 interest rates gibson 14 hendershott and van horne 19 pearce 30 and mishkin 27 and consumption wachtel 36 generally with a significant improvement in explanatory power they have also been used as dependent variables in attempts to determine how expectations are formed by gordon 15 mullineaux 28 jacobs and jones 20 and figlewski and wachtel 9 for the economist survey van duyne 35 for the household survey and leonard 23 and de leeuw and mckelvey 4 for businesses given their different levels of knowlege of economics and perspectives one might expect that the models used by the different groups to forecast inflation would

long run inflation expectations in the shrinking upper tail abstract consumer inflation expectations are highly disperse with some households reporting very high inflation forecasts in recent years disagreement in longer run inflation expectations has fallen reflecting compression in the upper part of the distribution the 75th percentile of the distribution of longer run inflation forecast has fallen 0 21 percentage points per year since 2012 and is at an all time low i show that the decline in long run inflation expectations at the upper end of the distribution seems to reflect improvement in consumers general economic sentiment rather than stronger anchoring of inflation expectations

firm optimism and pessimism abstract this paper explores the question of whether firms have systematic expectation biases using microdata from the west german manufacturing subset of the ifo business climate survey we infer quarterly production growth rates at the firm level we then combine this information with production growth expectations over a quarterly horizon to construct quantitative firm specific expectation errors our findings show that at most one third of our firms systematically over or underpredict their production growth one quarter ahead our findings further show that larger and exporting firms tend to have more realistic expectations while firms with higher leverage are more prone to expectations that are biased towards optimism

the effects of oil supply and demand shocks on u s consumer sentiment this paper investigates how the university of michigan s index of consumer sentiment responds to oil price shocks while oil supply shocks play only a limited role the effect of aggregate demand shocks is positive for the first few months and negative thereafter a typical other oil demand shock has a significant negative impact for up to 2 years by studying the responses of individual survey questions we find that expectations of future inflation and a change in real household income as well as perceived vehicle and house buying conditions are the main transmission channels of oil supply and demand shocks

does consumer sentiment forecast household spending if so why in the three months following the iraqi invasion of kuwait the university of michigan s index of consumer sentiment ics fell an unprecedented 24 3 index points to its lowest level since the 1981 1982 recession this collapse in household confidence became the focus of a great deal of economic commentary and indeed frequently was cited as an important if not the leading cause of the economic slowdown that ensued concern was fueled by the well known contemporaneous correlation between the ics and the growth of household spending figure 1 shows quarterly averages of the index 1978 1993 together with the quarterly growth in real personal consumption expenditures as measured in the national income accounts bureau of economic analysis the correlation is impressive of course it is not surprising that sentiment and the growth of spending are positively correlated this correlation may simply reflect that when economic prospects are poor households curtail their spending and also give gloomy responses to interviewers thus the contemporaneous correlation between sentiment and spending does not refute traditional life cycle or permanentincome models of consumption nor does it necessarily make the job of forecasting changes in consumption any easier from the point of view of an economic forecaster the questions of interest are first whether an index of consumer sentiment has any predictive power on its own for future changes in consumption spending and second whether it contains information about future changes in consumer spending aside from the information contained in other available indicators in section i we present evidence that the answer to the first question is a clear yes we find that lagged values of the ics taken on their own explain about 14 percent of the variation in the growth of total real personal consumption expenditures over the post1954 period further investigation shows that the answer to the second question is probably yes as well though here the margin is narrower and the evidence more murky the ics contributes about 3 percent to the r2 of a simple reduced form equation for total personal consumption expenditures in the longer of the two sample periods we examine but nothing in the shorter sample period though the latter result is heavily influenced by the observation for 1980 2 for the major subcategories of spending the contribution generally ranges between 1 percent and 8 percent overall we read the evidence as pointing toward at least some significant incremental explanatory power therefore we take as given for the remainder of the paper that sentiment forecasts spending and we turn to the issue of how that statistical relationship should be interpreted one possible interpretation is that sentiment is an independent driving factor in the economy and that changes in carroll division of research and statistics stop 80 federal reserve board washington dc 20551 fuhrer research department federal reserve bank of boston boston ma 02106 wilcox division of monetary affairs stop 71 federal reserve board washington dc 20551 we have benefited from the research assistance of stephen helwig and christopher geczy and the comments of an anonymous referee the views expressed in this paper are those of the authors and not of the federal reserve board the federal reserve bank of boston or the other members of the staff of either institution ithe conference board s consumer confidence index also plunged at the same time

socioeconomic status and learning from financial information abstract the majority of lower socioeconomic status ses households in the u s and europe do not have stock investments which is detrimental to wealth accumulation here we examine one explanation for this puzzling fact namely that economic adversity may influence how people learn from financial information using experimental and survey data from the u s and romania we find that lower ses individuals form more pessimistic beliefs about the distribution of stock returns and are less likely to invest in stocks when these investments are likely to have good outcomes ses related differences in pessimism may help explain variation in investments across households

rational forecasts or social opinion dynamics identification of interaction effects in a business climate survey this paper develops a methodology for estimating the parameters of dynamic opinion or expectation formation processes with social interactions we study a simple stochastic framework of a collective process of opinion formation by a group of agents who face a binary decision problem the aggregate dynamics of the individuals decisions can be analyzed via the stochastic process governing the ensemble average of choices numerical approximations to the transient density for this ensemble average allow the evaluation of the likelihood function on the base of discrete observations of the social dynamics this approach can be used to estimate the parameters of the opinion formation process from aggregate data on its average realization our application to a well known business climate index provides strong indication of social interaction as an important element in respondents assessment of the business climate

using subjective income expectations to test for excess sensitivity of consumption to predicted income growth abstract we test for precautionary saving and excess sensitivity of consumption to predicted income growth using a 1989 1993 panel survey of italian households that has measures of subjective income and inflation expectations these expectations provide a powerful instrument for predicting income growth the empirical specification controls for predictable changes in labor supply and allows a fairly general specification for the stochastic structure of the forecast error we find that consumption growth is positively correlated with the expected variance of income and uncorrelated with predicted income growth overall the results support the precautionary saving model

consumer response to the timing of income evidence from a change in tax withholding in 1992 the income tax withholding tables were adjusted so that withholding was reduced a typical worker received an extra 28 80 in take home pay per month in march through december 1992 to be offset by a lower tax refund in 1993 the change in withholding amounted to 0 5 percent of gdp president bush who proposed this change in his state of the union address intended that it provide a temporary stimulus to demand but the policy change involved only the timing of income so under the life cycle permanent income model it would be predicted to have a negligible effect on consumption and aggregate demand this paper reports consumers responses to the change in withholding the results are based on a survey taken shortly after it went into effect forty three percent of consumers report spending the extra take home pay substantially more than the zero percent predicted by the standard models but substantially less than the one hundred percent upon which the policy was predicated the decision to save the income is not explained by expected income growth therefore while behavior of many households is not fully consistent with the life cycle permanent income model liquidity constraints do not appear to account for this behavior this abstract was borrowed from another version of this item

do actions speak louder than words household expectations of inflation based on micro consumption data survey data on household expectations of inflation are routinely used in economic analysis yet it is not clear how accurately households are able to articulate their expectations in survey interviews we propose an alternative approach to recovering households expectations of inflation from their consumption expenditures we show that these expectations measures have predictive power for consumer price index cpi inflation they are better predictors of cpi inflation than household survey responses and more highly correlated with professional inflation forecasts except for highly educated consumers consistent with the view that more educated consumers are better able to articulate their expectations we also document that households inflation expectations respond to inflation news as measured by the unpredictable component of inflation predictions in the survey of professional forecasters the response to inflation news tends to increase with households level of education consistent with the existence of constraints on household s ability to process this information

household saving micro theories and micro facts in this survey we review the recent theoretical and empirical literature on household saving and consumption the discussion is structured around a list of motives for saving and how well the standard theory captures these motives we show that almost all of the motives for saving that have been suggested in the informal saving literature can be captured in the standard optimizing model particular attention is given to recent work on the precautionary motive and its implications for saving and consumption behavior we also discuss the behavioral or psychological approach that eschews the use of standard optimization techniques and focuses instead on direct consideration on saving we provide a section on facts who save and how much we then discuss informally the recent decline in the u s saving rate and whether the theory is of much use in understanding this and other changes in aggregate saving rates over time we do not find any convincing explanation for the change in saving rates we also discuss some analyses of saving behavior over the life cycle addressing such questions as whether households save enough for retirement and whether the consumption patterns of older households can be rationalized within a simple life cycle model we also review a great number of studies of the consumption euler equations based on our analysis of the studies cited we conclude that there is still mixed evidence that consumption is excessively sensitive to income we also examine in depth the recent empirical literature on the precautionary motive we conclude that although some households do seem to have a significant precautionary motive at some points in their life cycle this motive is not so strong empirically as some investigators suggest

consumer spending and the economic stimulus payments of 2008 abstract we measure the change in household spending caused by receipt of the economic stimulus payments of 2008 using questions added to the consumer expenditure survey and variation from the ran

testing for liquidity constraints in euler equations with complementary data sources previous tests for liquidity constraints using consumption euler equations have frequently split the sample on the basis of wealth arguing that low wealth consumers are more likely to be constrained we propose alternative tests using different and more direct information on borrowing constraints obtained from the 1983 survey of consumer finances in a first stage we estimate probabilities of being constrained which are then utilized in a second sample the panel study of income dynamics to estimate switching regression models of the euler equation our estimates indicate stronger excess sensitivity associated with the possibility of liquidity constraints than the sample splitting approach

survey measures of expected u s inflation of real interest rates and cash flows for decisions concerning investment expenditures international capital flows and exchange rate movements hinge in large part on expected real yield differentials across countries the federal reserve needs reliable measures of expected inflation to formulate and gauge the thrust of monetary policy in fact inflation expectations have become more important to the fed given the diminished stability of the link between the monetary aggregates and gdp expenditures since the early 1980s and the greater role which has been thrust upon expected real short term interest rates in the implementation of federal reserve policy the issue of rationality of inflation expectations that is the extent to which agents form expectations without making systematic mistakes in their beliefs about what inflation will be is important if inflation expectations are formed rationally labor and financial markets will strongly tend to neutralize the potential redistributive effects of inflation over time financial capital will flow efficiently within and across national borders moreover some of the stronger claims of new classical macroeconomics like the claim that only unexpected monetary policy actions will

consumer sentiment and consumer spending decomposing the granger causal relationship in the time domain it is often believed that the consumer sentiment index has predictive power for future consumption levels while granger causality tests have already been used to test for this no attempt has been made yet to quantify the predictive power of the consumer sentiment index over different time horizons in this article we decompose the granger causality at different time lags by looking at a sequence of nested prediction models since the consumer sentiment index turns out to be cointegrated with real consumption we resort to error correcting models four consumption series are studied namely total real consumption real consumption of durables non durables and services among other findings we show that the consumer sentiment index granger causes future consumption with an average time lag of 4 5 months furthermore it is found that the consumer sentiment index has more incremental predictive power for consumption of services than for consumption of durables or non durables and that the index is not

a portfolio view of consumer credit abstract to compute risk adjusted returns and gauge the volatility of their portfolios lenders need to know the covariances of their loans returns with aggregate returns we use unique credit bureau data to measure individuals covariance risk i e the covariance of their default risk with aggregate consumer default rates and more generally to analyze the distribution of credit including the effects of credit scores we find significant heterogeneity in covariance risk across consumers also the amount of credit they obtain significantly increases with their credit scores and decreases with their covariance risk especially revolving credit though the effect of covariance risk is smaller

consumer confidence and rational expectations are agents beliefs consistent with the theory consumer confidence is found to have predictive content for a wide range of macroeconomic variables including consumption growth contrary to standard repih we find that on uk data the repih is rejected due to the predictive content of consumer confidence and not labour income we explain this finding in terms of precautionary behaviour extending the hansen and singleton consumption capm model to allow a conditional variance we find a high level of confidence is associated with both greater optimism about the level of consumption and greater uncertainty about the forecaster variance once allowance is made for time aggregation the over identifying restrictions implied by this model are accepted we estimate a small but statistically significant intertemporal elasticity of substitution

household expenditure and the income tax rebates of 2001 using questions expressly added to the consumer expenditure survey we estimate the change in consumption expenditures caused by the 2001 federal income tax rebates and test the permanent income hypothesis we exploit the unique randomized timing of rebate receipt across households households spent 20 to 40 percent of their rebates on nondurable goods during the three month period in which their rebates arrived and roughly two thirds of their rebates cumulatively during this period and the subsequent three month period the implied effects on aggregate consumption demand are substantial consistent with liquidity constraints responses are larger for households with low liquid wealth or low income

a panel data model for subjective information on household income growth abstract subjective expectations about future income changes are analyzed using household panel data the models used are extensions of existing binary choice panel data models to the case of ordered response we consider static models with random and fixed individual effects we also look at a dynamic random effects model which includes a measure for permanent and transitory income we find that income change expectations strongly depend on realized income changes in the past those whose income fell are more pessimistic than others while those whose income rose are more optimistic expected income changes are also significantly affected by employment status family composition permanent income and past expectations expectations are then compared to the head of household s ex post perception of the realized income change for the same period the main finding is that rational expectations are rejected and that in particular households whose income has decreased in the past underestimate their future income growth

a naive sticky information model of households inflation expectations this paper provides a simple epidemiology model where households when forming their inflation expectations rationally adopt the past release of inflation with certain probability rather than the forward looking newspaper forecast as suggested in carroll 2003 macroeconomic expectations of households and professional forecasters quarterly journal of economics 118 269 298 the posterior model probabilities based on the michigan survey data strongly support the proposed model we also extend the agent based epidemiology model by deriving for it a simple adaptation which is suitable for estimation our results show that this model is able to capture the heterogeneity in households expectations very well

socioeconomic status and macroeconomic expectations we show that individuals macroeconomic expectations are influenced by their socioeconomic status ses people with higher income or higher education are more optimistic about future macroeconomic developments including business conditions the national unemployment rate and stock market returns the spread in beliefs between high and low ses individuals diminishes significantly during recessions a comparison with professional forecasters and historical data reveals that the beliefs wedge reflects excessive pessimism on the part of low ses individuals ses driven expectations help explain why higher ses individuals are more inclined to invest in the stock market and more likely to consider purchasing homes durable goods or cars received november 13 2017 editorial decision february 12 2019 by editor wei jiang authors have furnished an internet appendix which is available on the oxford university press web site next to the link to the final published paper online

disagreement and biases in inflation expectations empirical work documents substantial disagreement in inflation expectations obtained from survey data furthermore the extent of such disagreement varies systematically over time in a way that reflects the level and variance of current inflation this paper oers a simple explanation for these facts based on asymmetries in the forecasters costs of over and under predicting inflation our model implies biased forecasts with positive serial correlation in forecast errors and a cross sectional dispersion that rises with the level and the variance of the inflation rate it also implies that forecast errors at dierent horizons can be predicted through the spread between the short and long term variance of inflation we find empirically that these patterns are present in inflation forecasts from the survey of professional forecasters a constant bias component not explained by asymmetric loss and rational expectations is required to explain the shift in the sign of the bias observed for a substantial portion of forecasters around 1982

relative wage movements and the distribution of consumption we analyze how relative wage movements among birth cohorts and education groups affected the distribution of household consumption and economic welfare our empirical work draws on the best available cross sectional data sets to construct synthetic panel data on u s consumption labor supply and wages during the 1980s we find that low frequency movements in the cohort education structure of pretax hourly wages among men drove large changes in the distribution of household consumption the results constitute a spectacular failure of between group consumption insurance a failure not explained by existing theories of informationally constrained optimal consumption behavior a welfare analysis indicates that the cost of between group consumption variability is larger than the cost of aggregate consumption variability by two orders of magnitude

can households see into the future survey evidence from the netherlands abstract this paper presents new evidence on the expectation formation process from a dutch household survey households become too optimistic about their future income after their income has improved consistent with the overextrapolation of their experience we show that this effect of experience is persistent and that households overextrapolate income losses more than income gains furthermore older households overextrapolate more suggesting that they did not learn over time to form more accurate expectations finally we study the relationship between expectation errors and consumption we find that more overoptimistic households intend to consume more and subsequently report higher consumption even though they do not consume as much as they intended to these results suggest that overextrapolation hurts consumers and amplifies business cycles

saving and income smoothing evidence from panel data abstract in this paper we use data from a panel of dutch households to investigate the behavior of savings as in campbell 1987 we examine whether the pattern of savings is consistent with the predictions of the rational expectations permanent income model we consider one important prediction of the model whether savings anticipate future income changes we test the predictions of the permanent income model in several ways first we propose some informal tests that exploit directly the information on expected future income changes available in the data we then perform a test of the model by setting up a vector autoregression var in terms of savings and income changes and by using euler equations expressed in terms of savings the empirical evidence shows that in all the specifications used in this paper the permanent income model is rejected contrary to the evidence from u s macro data we do not find that the excess sensitivity of consumption to income is responsible for the rejection of the model

the expected price of keeping up with the joneses abstract inflation expectations elicited in surveys have been found to exhibit large dispersion across individuals although several explanations have been proposed none fully explain this puzzle we explore in this paper a new behavioral factor social comparison using original survey data we find that respondents who feel they are falling behind compared to their peers report significantly and substantially higher inflation expectations we argue that this result is consistent with an experience based belief formation model in which those unable to keep up with the joneses overweight the high prices of aspiration goods they are unable to purchase

expectations heterogeneous forecast errors and consumption micro evidence from the michigan consumer sentiment surveys the household data underlying the michigan index of consumer sentiment are used to test the rationality of consumer expectations and their usefulness in forecasting expenditure the results can be interpreted as characterizing the shocks that hit different types of households over time expectations are found to be biased and inefficient at least ex post people underestimated the disinflation of the early 1980s and the severity of recent business cycles people s forecast errors are also systematically correlated with their demographic characteristics in part because of time varying group level shocks further sentiment helps forecast consumption growth some of this rejection of the permanent income hypothesis is due to the systematic demographic components in forecast errors

exchange rate forecasts and expected fundamentals using a large panel of individual professionals forecasts this paper demonstrates that good exchange rate forecasts are related to a proper understanding of fundamentals specifically good interest rate forecasts this relationship is robust to individual fixed effects and further controls reassuringly the relationship is stronger during phases when the impact from fundamentals is more obvious e g when exchange rates substantially deviate from their ppp values finally forecasters largely agree that an interest rate increase relates to a currency appreciation but only good forecasters get expected interest rates right

economic literacy and inflation expectations evidence from a laboratory experiment we present experimental evidence of a link between economic literacy and inflation forecast accuracy the experiment investigates two channels through which economic literacy may enable better forecasts i choice of information and ii use of information more literate subjects choose more relevant information and use the given information more effectively starting from a 10th percentile score the boost in literacy from taking an economics course predicts a 0 64 standard deviation decline in mean absolute forecasting error our findings suggest that a significant portion of demographic heterogeneity in inflation expectations observed in survey data may be driven by heterogeneity in economic literacy

the reaction of consumer spending and debt to tax rebates evidence from consumer credit data we use a new panel data set of credit card accounts to analyze how consumers responded to the 2001 federal income tax rebates we estimate the monthly response of credit card payments spending and debt exploiting the unique randomized timing of the rebate disbursement we find that on average consumers initially saved some of the rebate by increasing their credit card payments and thereby paying down debt but soon afterward their spending increased counter to the permanent income model spending rose most for consumers who were initially most likely to be liquidity constrained whereas debt declined most so saving rose most for unconstrained consumers

is consumption growth consistent with intertemporal optimization evidence from the consumer expenditure survey in this paper we show that some of the predictions of models of consumer intertemporal optimization are in line with the patterns of nondurable expenditure observed in u s household level data we propose a flexible specification of preferences that allows multiple commodities and yields empirically tractable equations we estimate preference parameters using the only u s micro data set with complete consumption information we show that previous rejections can be explained by the simplifying assumptions made in previous studies we also show that results obtained using good consumption or aggregate data can be misleading

inflation expectations as a policy tool abstract we assess the prospects for central banks using inflation expectations as a policy tool for stabilization purposes we review recent work on how expectations of agents are formed and how they affect their economic decisions empirical evidence suggests that inflation expectations of households and firms affect their actions but the underlying mechanisms remain unclear especially for firms two additional limitations prevent policy makers from being able to actively manage inflation expectations first available surveys of firms expectations are systematically deficient which can only be addressed through the creation of large nationally representative surveys of firms second neither households nor firms expectations respond much to monetary policy announcements in low inflation environments we provide suggestions for how monetary policy makers could pierce this veil of inattention through new communication strategies as well as the potential pitfalls to trying to do so

what drives aggregate investment evidence from german survey data abstract the ifo investment survey asks firms in the german manufacturing sector about the importance of sales technological factors finance return expectations and macroeconomic policy for their investment activity in a given year we show that these subjective investment determinants 1 capture economically what their labels suggest and 2 have strong explanatory power for aggregate manufacturing investment growth fluctuations in a second step we use these determinants to identify aggregate demand and aggregate technology shocks and argue that the bulk of the variance of both aggregate manufacturing investment and output growth fluctuations as much as approximately two thirds in both cases is explained by aggregate demand shocks consistent with neoclassical views however technological factors are the most important investment determinant on average

updating inflation expectations evidence from micro data utilizing the michigan household consumer survey s rotating panel microstructure we can identify if individuals have adjusted their expectations towards inflation this allows us to directly capture the updating behavior of individual consumers regarding their short and long run inflation expectations

public information and inflation expectations microeconometric evidence from a natural experiment abstract governments provide public information to reduce information imperfections do households rely on public signals to inform themselves about market conditions to identify the importance of public information in households price expectations we take advantage of a unique natural experiment in ecuador where the published inflation rate had been different from the correct rate over a period of fourteen months due to a software error we find that the public signal about prices plays an important role in households price expectations and the change in price expectations affects their savings choices the effect is stronger for better educated and older people

earnings expectations revisions and realizations during the spring and the fall of 1993 respondents to a national household survey were asked to report expectations of spring 1994 weekly earnings elicited in the form of subjective probabilities these data are potentially much more informative than are typical reports of economic expectations subjective probability distributions of future weekly earnings are estimated for each respondent based on his or her reports of a series of subjective probabilities this paper analyzes the cross sectional variation in expectations revisions of expectations between the spring and the fall of 1993 and the relationship between 1993 expectations and the distribution of spring 1994 earnings realizations generally positive findings on the validity of the data bode well for the prospects of eliciting expectations in future surveys

household optimism and overborrowing we use finnish household level data from 1994 to 2013 to measure how often and what kind of forecast errors households make and how the errors are linked to the households borrowing behavior and overindebtedness we find that those households that make the largest optimistic forecast errors have greater debt to income ratios they also are more likely to report that they suffer from excessive debt loads and have problems in coping with their bills there are no such systematic effects for the households that make pessimistic forecast errors

core and crust consumer prices and the term structure of interest rates we propose a model for nominal and real term structures of interest rates that includes dynamics for the three main components of total inflation core food and energy these dynamics combine together to produce a measure of expected total inflation that investors use to price nominal treasuries this framework captures different frequencies in inflation fluctuations shocks to core are more persistent and less volatile than shocks to food and especially energy the crust we find that a common structure of latent factors determines and predicts the term structure of yields and inflation our model outperforms popular benchmarks e g arma var and random walk specifications and it is at par with the survey of professional forecasters in forecasting inflation moreover we estimate real rates that agree with inflationindexed bond yields after adjusting for the liquidity premium in these bonds finally inflation and real rate risk premia show a declining pattern consistent with the changing nature of inflation and real rate risks

psychology consumer sentiment and household expenditures the aim of this article is to assess the role of the italian consumer sentiment index csi as an autonomous driving force of consumption decisions we test for the presence of rule of thumb consumers as originally proposed by campbell and mankiw 1991 using sentiment measures distinguished by respondent s working condition and consumption data disaggregated according to durability over the period 1982 2004 the consumption sentiment relationship is found to be stronger for some groups of households and for some particular categories of expenditures moreover sentiment seems to be not well explained by economic fundamentals alone capturing also the effects of the political cycle and exceptional circumstances

rural labor and credit markets this paper studies changes over time in the incidence of labor tying the existing literature is successful in explaining the emergence of this institution but contains the counterfactual implication that there should be an increasing trend in labor tying however previous contributions have so far implicitly assumed that there are no consumption credit markets available to workers i show that taking account of borrowing opportunities leads to new predictions about the evolution of permanent labor in particular declines in borrowing costs associated to efficiency gains in the financial sector lead to a fall in the fraction of rural workers who are tied in addition if consumption credit markets are operating a fall in the size of the rural population will cause under certain conditions a decline in the percentage of permanent workers these predictions are consistent with the observed trends in developing countries hence this paper complements previous theoretical work on labor tying with its addition the theory now explains the emergence persistence and final demise of this institution 1997 elsevier science b v

testing the rationality of price forecasts new evidence from panel data this paper tests the rationality of individual price forecasts in a panel of professional forecasters here unlike in most previous studies rationality is not rejected the results here differ because 1 using individual forecasts avoids aggregation bias 2 comparison of forecasts to initial data avoids bias due to data revision 3 the professional forecasters have economic incentives to state their expectations accurately and 4 a new covariance matrix estimator consistent when forecast errors are correlated across individuals is used copyright 1990 by american economic association

the sensitivity of consumption to transitory income estimates from panel data on households we investigate the stochastic relation between income and consumption specifically consumption of food within a panel of about 2 000 households our major findings are 1 consumption responds much more strongly to permanent than to transitory movements of income 2 the response to transitory income is nonetheless clearly positive 3 a simple test independent of our model of consumption rejects a central implication of the pure life cycle permanent income hypothesis the observed covariation of income and consumption is compatible with pure life cycle permanent income behavior on the part of80 percent of families and simple proportionality of consumption and income among the remaining 20 percent as a general matter our findings support the view that families respond differently to different sources of income variations in particular temporary income tax policies have smaller effects on consumption than do other more permanent changes in income of the same magnitude this abstract was borrowed from another version of this item

credit card debt and consumption evidence from household level data this research investigates the relationship between credit card debt and consumption using household level data this is a departure from the previous studies which have used aggregate measures of consumption and general debt such as the debt service ratio or total revolving credit we use a detailed monthly survey of credit card use to impute credit card debt to respondents from the consumer expenditure survey sample in contrast to some earlier studies using aggregate data we find a negative relationship between debt and consumption growth our work shows that a 1000 increase in credit card debt results in a decrease in quarterly consumption growth of almost 2 investigations are also made into effects of debt within different age categories and into the impact of expected income growth on the debt consumption relationship

curb your enthusiasm optimistic entrepreneurs earn less abstract this paper concerns the implications of biased beliefs on entrepreneurial earnings amongst self employed business owners income is decreasing in optimism measured whilst still an employee controlling for earnings in paid employment self employment earnings of those with optimism above the mean are some 30 less than those with optimism below the mean for employees it is optimists that have higher earnings these and associated results suggest that mistaken expectations lead to entry errors as a test of external validity future divorcees turn out to be financial optimists indicating our measure captures an intrinsic psychological trait associated with rash decisions

the role of media for inflation forecast disagreement of households and professional forecasters this paper investigates the effects of media coverage about consumer price inflation on inflation forecast disagreement of german households and professional forecasters we adopt a bayesian learning model in which media coverage of inflation affects forecast disagreement by influencing information sets as well as predictor choice our empirical results show that disagreement of households depends on the heterogeneity of story content and on the reporting intensity especially of news on rising inflation disagreement of professional forecasters does not depend on media coverage with respect to the influence of macroeconomic variables we provide evidence that disagreement of professional forecasters primarily depends on the inflation rate and on inflation volatility the response of households to inflation is much less pronounced

efficient aggregation of panel qualitative survey data qualitative business survey data are used widely to provide indicators of economic activity ahead of the publication of official data traditional indicators exploit only aggregate survey information namely the proportions of respondents who report up and down this paper examines disaggregate or firm level survey responses it considers how the responses of the individual firms should be quantified and combined if the aim is to produce an early indication of official output data having linked firms categorical responses to official data using ordered discrete choice models the paper proposes a statistically efficient means of combining the disparate estimates of aggregate output growth which can be constructed from the responses of individual firms an application to firm level survey data from the confederation of british industry shows that the proposed indicator can provide early estimates of output growth more accurately than traditional indicators copyright 2012 john wiley sons ltd

surprise surprise measuring firm level investment innovations abstract using the ifo investment survey for the german manufacturing sector we construct a forty year panel of firm level investment innovations surprises we document the cross sectional and time series properties of this panel and our main findings are the cross sectional dispersion of investment surprises is countercyclical as is their average within firm time series volatility and both are highly correlated this justifies in part strategies in the literature to use cross sectional moments for the calibration of heteroscedasticity at the same time the cross sectional dispersion of investment is procyclical suggesting a nonsmooth capital adjustment friction at the micro level there is substantial dispersion in within firm volatility a feature consistent with a recent literature on information frictions at the firm level finally the aforementioned second moments of investment innovations are granger caused by recessions but not vice versa rendering simple exogenous uncertainty shocks less plausible as drivers of business cycles

whose expectations augment the phillips curve abstract this letter uses consumer survey data to estimate expectations augmented phillips curves with inflation expectations disaggregated by socioeconomic and demographic groups the inflation expectations of high income college educated male and working age people play a larger role in inflation dynamics than do the expectations of other groups of consumers or of professional forecasters

permanent income current income and consumption evidence from two panel data sets in this article i estimate euler equations that is the first order conditions of the consumers maximization problem using data from two data sets consumption data are taken from the consumer expenditure survey income data are taken from the panel study of income dynamics because the data for the estimation come from two samples i use a generalization of the instrumental variables estimator the two sample instrumental variables estimator i find evidence that consumption is excessively sensitive to predictable income growth the estimates of the coefficient of excess sensitivity for three consumption measures range from 2 to 5

formation of rationally heterogeneous expectations this paper models expectation formation by taking into account that agents may produce heterogeneous expectations because of informational frictions and differing levels of a capacity to process information we show that there are two general classes of steady states within this framework those where strictly dominated forecasting rules vanish and those heterogeneous states where a positive proportion of agents uses a more costly perfect foresight we demonstrate that intrinsic heterogeneity can also arise in a model where the forecasting rules are not equally costly and do not exhibit identical performance in the long run

unconventional economic policies and sentiment an international assessment this paper estimates using bayesian and global vars the spillover effects of unconventional fiscal and monetary policies implemented in the united states and in the eurozone during the last decade consumer confidence and investor sentiment indicators are introduced in the models in order to highlight the signalling channel in the responses to economic policy innovations in times of crisis our results reveal that consumer and investor perceptions of innovative economic measures are relevant to study the pass through of economic policies to the real sector in times of crisis and zero lower bound interest rates in particular the signalling channel plays an important role in successful unconventional economic policies moreover if unconventional economic policies have an impact abroad the effects are similar to those measured in the domestic country region consequently coordination and transparency are a prerequisite for ensuring short term growth after a global financial crisis

turns in consumer confidence an information advantage linked to manufacturing this research shows that the manufacturing sector contains private information advantages for consumer confidence it examines the consumer confidence manufacturing link by comparing the u s national level index of consumer sentiment with identically constructed confidence indices from a key manufacturing state and a nonmanufacturing state granger causality analysis shows that the manufacturing state s confidence index leads the national index whereas the nonmanufacturing state s confidence index lags it factors influencing confidence include percentage manufacturing employment equity markets indicators and disposable income fitting a consumption function to confidence measures for the three confidence indices shows the strongest relationship to be in the manufacturing state jel d12 copyright 2006 oxford university press

the response of household consumption to income tax refunds a central implication of the life cycle or permanent income theory is that consumption should not respond to predictable fluctuations in income tests of this implication have yielded mixed results especially on micro data angus deaton 1992 martin browning and annamaria lusardi 1996 in large part this might be due to the difficulties of isolating the predictable component of income at the micro level most tests proceed by instrumenting for income but since the available instruments are typically poor such tests might be prejudiced against finding significant excess sensitivity of consumption to income john shea 1995 also it is not clear how closely the resulting econometric predictions of income coincide with agents actual expectations of income to avoid these difficulties this paper examines the response of household consumption to a particular type of income that is both predictable and transitory income tax refunds since a refund depends on events in the previous calendar year it is predictable income as regards consumption in the year of its receipt consequently under the life cycle theory consumption should not increase on receipt of a refund 2 in addition to testing the canonical model of consumption this paper provides estimates interpretable as the marginal propensity to consume mpc out of refunds since federal tax refunds now amount to over 80 billion per year averaging well over 1 000 per refund these estimates are of interest in themselves more generally they bear on the impact of even preannounced and temporary changes in fiscal policy the paper begins by surveying related studies in section i section ii describes the data the consumer expenditure survey cex which of the leading u s micro data sets has the most comprehensive coverage of expenditure the empirical specification is set out in section hi section iv reports the results and section v concludes

information animal spirits and the meaning of innovations in consumer confidence we show that unexplained innovations in several variables representing survey responses to forwardlooking questions on the michigan survey of consumers have powerful prognostic implications for the future paths of macroeconomic variables we attempt to distinguish the hypothesis that these impulse responses indicate a causal channel from autonomous movements in sentiment to economic outcomes the animal spirits view from the alternative interpretation that the surprise confidence movements summarize information about future economic prospects the information view in natural rate models animal spirits shocks are associated with overshooting of among other variables consumption that attenuates when agents come to grips with their overreaction while information shocks about the long future are followed by gradual movements in macroeconomic variables that are not subsequently reversed in a baseline vector autoregression involving consumption income and confidence the data come down sharply in favor of the information view the impulse responses of consumption and gdp show no tendency to attenuate even after a number of years further confidence innovations have strong implications for labor productivity many quarters into the future in somewhat larger vars with an information block that includes inflation and or stock prices the impulse responses to confidence innovations continue to have the permanent shape that defines information shocks but they are smaller in magnitude we demonstrate that this is due to the fact that both inflation and stock price innovations have prognostic implications for future productivity that are very similar to the implications of innovations in confidence addition of unemployment to the system induces a transitory component that changes the shape of the impulse responses and somewhat weakens the previously airtight case against animal spirits but it does not provide constructive evidence of such effects

how prudent are consumers using data from the consumer expenditure survey this paper presents a simple test that provides an explicit estimate of the parameter in the utility function that reflects the strength of the precautionary saving motive the coefficient of relative prudence the test yields a fairly precise estimate of a small precautionary motive in fact the estimate is too small to be consistent with widely accepted beliefs about risk aversion the presence of liquidity constrained households does not appear to explain this finding and there is some evidence that self selection of households into risky environments also cannot explain the results

bank size and household financial sentiment surprising evidence from university of michigan surveys of consumers we analyze comparative advantages disadvantages of small and large banks in improving household sentiment regarding financial conditions we match sentiment data from the university of michigan surveys of consumers with local banking market data from 2000 to 2014 surprisingly the evidence suggests that large rather than small banks have significant comparative advantages in boosting household sentiment findings are robust to instrumental variables and other econometric methods additional analyses are consistent with both scale economies and the superior safety of large banks as channels behind the main findings these channels appear to more than offset stronger relationships with and greater trust in small banks

evaluating how predictable errors in expected income affect consumption this article studies whether anomalies in consumption can be explained by a behavioural model in which agents make predictable errors in forecasting income we use a micro data set containing subjective expectations about future income this article shows that the null hypothesis of rational expectations is rejected in favour of the behavioural model since consumption responds to predictable forecast errors on average agents who we predict are too pessimistic increase consumption after the predictable positive income shock on average agents who are too optimistic reduce the consumption

modelling multi period inflation uncertainty using a panel of density forecasts this paper examines the determinants of inflation forecast uncertainty using a panel of density forecasts from the survey of professional forecasters spf based on a dynamic heterogeneous panel data model we find that the persistence in forecast uncertainty is much less than what the aggregate time series data would suggest in addition the strong link between past forecast errors and current forecast uncertainty as often noted in the arch literature is largely lost in a multi period context with varying forecast horizons we propose a novel way of estimating news and its variance using the kullback leibler information and show that the latter is an important determinant of forecast uncertainty our evidence suggests a strong relationship of forecast uncertainty with level of inflation but not with forecaster discord or with the volatility of a number of other macroeconomic indicators copyright 2006 john wiley sons ltd