Credit Market Experiences and Macroeconomic Expectations: Evidence and Theory

ABSTRACT

Using the NY Fed Survey of Consumer Expectations, I show that individuals give excessive weight to their personal credit rejections when forecasting U.S. credit markets, unemployment, and inflation. This evidence challenges standard belief-formation theories. I explain it through an associative memory model in which a rejection cues memories of bad aggregate conditions and experiences, thereby inflating pessimism about the macroeconomy. The data support three main predictions: (i) rejected individuals recall tighter credit conditions and project them onto more pessimistic forecasts, (ii) this forecast heterogeneity correlates with demographics, and (iii) during adverse shocks, there is not only disagreement but also aggregate overreaction. Incorporating these findings into a consumption-saving model and using data on planned durable consumption, I find that rejection-induced pessimism accounts for about 12% of the total negative impact on consumption --particularly for younger and lower-SES households, and in downturns-- leading to amplified contractions in aggregate demand.

Keywords:

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

Presented at:

Padova Macro Talks, Venice Summer Institute 2024: Expectation Formation, WAPFIN at Stern, 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, EEA-ESEM Conference, 13th ifo Conference on Macroeconomics and Survey Data, 21st Macro Finance Society Workshop, 5th Behavioral Macroeconomics Workshop, 7th Workshop on Subjective Expectations, UPF Applied Workshop, CREi International Macro Lunch, CREi Macroeconomics Lunch, HEC Paris Finance PhD Workshop (Paris)