by Alessandro Bucciol, Joshy Easaw, Serena Trucchi; CeRP WP 217/25
Abstract
In this paper we study how income shocks and aggregate conditions influence income expectations, their uncertainty, and expectation errors. We use a uniquely rich longitudinal Dutch survey collecting detailed information on the distribution of household income expectations. Our results show that income shocks, much more than aggregate conditions, induce a revision in income expectations across the entire spectrum of the expected income distribution, which is consistent with extrapolative behaviour. For the first time, we document that positive income shocks lead to an increase in income expectation uncertainty. Our results partly confirm an over-reaction to income shocks, particularly for negative income shocks and high income individuals. The above overall findings vary depending on the position in the income distribution. This evidence can be explained by different income processes and degrees of awareness regarding the impact of income shocks and aggregate conditions.
Published: January 2025