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Financial Expectations, Consumption and Saving: A Microeconomic Analysis

Author

Listed:
  • Sarah Brown

    (Department of Economics, The University of Sheffield)

  • Karl Taylor

    (Department of Economics, The University of Sheffield)

  • Robert McNabb

Abstract

We explore the determinants of individuals´ financial expectations using data from the British Household Panel Survey (BHPS) 1991-2001. Our findings suggest that individuals´ financial predictions are influenced by both the life cycle and the business cycle. We also investigate the extent to which the accuracy of past financial expectations affects current financial expectations. Interestingly, only past financial optimism matters, regardless of the accuracy of the prediction. We also explore the relationship between financial realisations and expectations and we find that expectations tend to fall short of financial realisations. Finally, we investigate the relationship between financial expectations, savings and consumption. Our findings suggest that financial optimism is inversely associated with savings and that current financial expectations serve to predict future consumption.

Suggested Citation

  • Sarah Brown & Karl Taylor & Robert McNabb, 2006. "Financial Expectations, Consumption and Saving: A Microeconomic Analysis," Working Papers 2006006, The University of Sheffield, Department of Economics, revised May 2006.
    • Handle: RePEc:shf:wpaper:2006006
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    References listed on IDEAS

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    More about this item

    Keywords

    Consumption; Financial Expectations; Financial Realisations; Forecasting Accuracy; Savings.;
    All these keywords.

    JEL classification:

    • D10 - Microeconomics - - Household Behavior - - - General
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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