Credit Market Experiences and Macroeconomic Expectations: Evidence and Theory

ABSTRACT

Using the New York Fed Survey of Consumer Expectations, I document a robust "rejection gap" in macroeconomic expectations: households recently denied credit are more pessimistic than otherwise similar households about credit conditions, inflation, unemployment, and stock prices, make systematically pessimistic forecast errors, and remember recent aggregate conditions as worse than they actually were. Standard informational and selection explanations cannot account for these patterns. They are, however, consistent with a memory-based account: a credit rejection shapes which past experiences come to mind when households think about the economy, and the resulting pessimism is strongest for outcomes that feel most similar to a rejection, a similarity ordering I measure directly in a new survey. The rejection gap is largest among younger and lower-income households (those with higher marginal propensities to consume) and nearly doubles during recessions (when adverse experiences come to mind most easily). Larger gaps are associated with lower durable spending and higher precautionary saving, providing a channel through which credit-market experiences can amplify aggregate demand fluctuations.

Keywords:

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

Presented at:

CEPR 11th European Workshop on Household Finance, Cognitive Foundations in Finance Conference, Sixth Joint BoC-ECB-New York Fed Conference on Expectations Surveys, Heidelberg University, 3rd BdF-CEPR-HEC-Oxford University-PSE Paris Conference on the Macroeconomics of Expectations, 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)