ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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The Role of Socio-economic Status in Shaping Macroeconomic Beliefs of Indian Households

Using a household-level panel data set on Indian households, it is shown that households’ macroeconomic beliefs—their expectations regarding country-level macroeconomic developments—depend on their socio-economic status. Households with higher income and with more educated members are more optimistic not only with respect to the overall future business conditions of the economy but also with respect to their future family finances. In addition to socio-economic status, the rural–urban divide also plays an important role in shaping Indian households’ macroeconomic expectations.

The views expressed in the article are those of the authors and do not reflect the views of the institutions they are affiliated with.

Beliefs of agents about future economic outcomes play a crucial role in their decision-making process and, consequently, have a potential to influence aggregate macroeconomic outcomes (Akerlof and Shiller 2010). The consumption, saving, and investment decisions of households are some of the important economic decisions that are driven by their expectations of future macroeconomic conditions and future family finances (Das et al 2020; Puri and Robinson 2007). Extant research suggests that there is a significant heterogeneity among households in their forecasts of macroeconomic aggregates (for example, business conditions, unemployment, inflation, and so on). Such heterogeneity or systematic biases in household beliefs can drive movements in asset prices and macroeconomic variables.

Recent empirical work has highlighted the role of individual or household-specific factors in macroeconomic expectations formation process. Individual experiences have a large impact on expectations of macroeconomic outcomes (Malmendier and Nagel 2016; Kuchler and Zafar 2019; Goldfayn-Frank and Wohlfart 2020; Malmendier et al 2021). Some studies have also analysed the impact of other individual/household-specific factors, such as IQ (D’Acunto et al 2019), geography (Bhamra et al 2019), and political affiliation (Bonaparte et al 2017) on beliefs about economic outcomes. The association between macroeconomic expectations and individual’s socio-economic status has been analysed using data from Michigan Survey of Consumers for the United States households in Das et al (2020). It was found that higher income or education of households was associated with greater optimism for future macroeconomic developments and this belief wedge between households varies over the business cycle period. The literature on the role of socio-economic status influencing the beliefs about economic outcomes is well-documented for developed economies (Das et al 2020; Kuhnen and Miu 2017; Vissing-Jorgensen et al 2007). To the best of our knowledge, there does not exist any such evidence for developing economies. Considering the importance of the role that beliefs play in influencing macro­economic dynamics, it becomes pertinent to understand the underlying causes of the heterogeneity in household beliefs for emerging economies given the heightened concerns associated with precision of macro­economic forecasts on account of myriad data challenges and limitations. We contribute to this literature by analysing and documenting these stylised facts for the Indian economy.

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Updated On : 18th Jul, 2022
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