Estimation of income expectations models using expectations and realization data

Abstract

This paper considers the use of expectations and realizations data to estimate income expectations conditional on observed attributes. When the researcher has no expectations data, inferring expectations from realizations requires knowledge of the information individuals possess and how they process this information to form expectations. While income expectations data may be used to avoid this requirement, the data may also be used to supplement or replace realizations data in estimation of these expectations formation models. The strength of the maintained assumptions and the potential usefulness of expectations data for identification and estimation are discussed in the context of models adopted in the consumption and saving literature. Estimates of these models based on Survey of Economic Expectations data and Panel Study of Income Dynamics realizations data yield strikingly similar findings, highlighting the potential complementary of the two forms of data.