Credit Market Experiences and Macroeconomic Expectations: Evidence and Theory

Résumé

Using the NY Fed Survey of Consumer Expectations, I show that people experiencing credit rejections are too pessimistic about US credit markets, inflation, unemployment, and stock prices. This finding challenges standard experience-effects, which are assumed to be domain specific, and has important economic implications. Using an associative memory model of belief formation I show, theoretically and empirically, that reliance on personal past rejections creates: i) systematic belief heterogeneity across age and other socio-economic groups, and ii) overreaction of average beliefs during recessions. Incorporating these findings into a consumptionsaving model and using data on planned durable consumption, I show that 12% of the total negative impact of rejections on planned consumption results solely from the pessimism bias. Finally, I show that this effect is particularly pronounced among young and low socio-economic status individuals, and during economic downturns, leading to amplified contractions in aggregate demand.