Debt and financial expectations: an individual and household level analysis

Abstract

In this paper we show that optimistic financial expectations impact positively on both the uantity of debt and the growth in debt, at the individual and household levels. Our heoretical model shows that this association is predicted under a variety of plausible cenarios. In the empirical analysis we explore the determinants of debt and of growth in ebt using British data. We find convincing support for our theoretical priors and show that t is optimistic financial expectations per se that are important in influencing debt, rather han the accuracy of individuals’ predictions regarding their future financial situation.Debt; Financial Expectations; Inter-temporal Consumption; Random Effects; Tobit Estimator