Credit Market Experiences and Macroeconomic Expectations: Evidence and Theory

ABSTRACT

Using the NY Fed Survey of Consumer Expectations, I show that people experiencing credit rejections are too pessimistic about US credit markets, inflation, unemployment, and stock prices. This finding challenges standard experience-effects, which are assumed to be domain specific, and has important economic implications. Using an associative memory model of belief formation I show, theoretically and empirically, that reliance on personal past rejections creates: i) systematic belief heterogeneity across age and other socio-economic groups, and ii) overreaction of average beliefs during recessions. Incorporating these findings into a consumption-saving model and using data on planned durable consumption, I show that 12% of the total negative impact of rejections on planned consumption results solely from the pessimism bias. Finally, I show that this effect is particularly pronounced among young and low socio-economic status individuals, and during economic downturns, leading to amplified contractions in aggregate demand.

Keywords:

experience-effect, memory, macroeconomic expectations, disagreement, consumption

Presented at:

Bocconi University, Toulouse School of Economics, University of Southern California, Simon Fraser University, HEC Montreal, Harvard Business School, Erasmus School of Economics, Bank of Spain, IESE Business School, Imperial College London, Kellogg Northwestern, 3rd WE ARE IN Macroeconomics and Finance Conference (Stockholm), EEA-ESEM Conference (Barcelona), 13th ifo Conference on Macroeconomics and Survey Data (Munich), 21st Macro Finance Society Workshop (Atlanta), 5th Behavioral Macroeconomics Workshop (Bamberg), 7th Workshop on Subjective Expectations (Milan), UPF Applied Workshop (Barcelona), CREi International Macro Lunch (Barcelona), CREi Macroeconomics Lunch (Barcelona), HEC Paris Finance PhD Workshop (Paris)