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Expectation Formation

Author

Listed:
  • Basit Zafar

    (Federal Reserve Bank of New York)

  • Theresa Kuchler

    (NYU Stern School of Business)

Abstract

We use novel survey panel data to estimate how personal experiences affect expectations about aggregate economic outcomes in housing and labor markets. We exploit cross-sectional and time series variation in differences in locally experienced house prices to show that respondents systematically extrapolate from personally experienced home prices when asked for their expectations about US house price development. In addition, higher volatility of locally experienced house prices causes respondents to report a wider distribution over expected future national house price movements. We find similar results for labor market expectations, where we exploit within-individual variation in labor market status to estimate the effect of own experience on national labor market expectations. Personally experiencing unemployment leads respondents to be significantly more pessimistic about future nationwide unemployment. Extrapolation from personal experiences is more pronounced for less sophisticated individuals for both housing and unemployment expectations.

Suggested Citation

  • Basit Zafar & Theresa Kuchler, 2015. "Expectation Formation," 2015 Meeting Papers 678, Society for Economic Dynamics.
    • Handle: RePEc:red:sed015:678
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    References listed on IDEAS

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