Matched transaction-level, credit-registry, and survey data show that consumers over-extrapolate from unexpected income shocks to their income expectations. Over-optimistic income forecasts raise current spending and lead to greater debt accumulation and higher default when incomes subsequently fall short. A consumption-savings model with defaultable unsecured debt and extrapolative Kalman filtering, in which consumers overreact to income surprises reconciles our empirical findings and shows extrapolative expectations can generate state-dependent household debt cycles.

We examine how fertility expectations influence financial risk-taking using nationally

representative data from three countries. Our results indicate that childless adults

who do not expect children are 21–36% more likely to invest in stocks than those

who expect children, controlling for personal characteristics. This effect persists also

when medical infertility instruments expectations. We find no similar effects for other

savings categories, nor differences in self-reported risk tolerance. Households expecting

children report shorter financial planning horizons, which may explain their lower

risk-taking. These results suggest declining fertility can increase young adults’ stock

market participation through childbearing expectations.

Government announcements about future actions can influence agents’ economic choices today. How do beliefs about future government policy affect households’ borrowing, spending and debt paydown behavior? We study this question through the lens of student loan forgiveness in the United States, which following electoral promises, was announced in 2022 but never implemented due to judicial rulings. We conduct a customized information provision experiment embedded in a survey eliciting real-time beliefs about future debt forgiveness and repayment, which we link to credit bureau data, employment verification data, and nondurables consumption. Borrowers who are more optimistic about forgiveness reduce payments on student loans and increase non-durable spending, but postpone durable spending while they wait for uncertainty to resolve. Our results provide micro-evidence on the role of policy uncertainty in household decisionmaking, and have implications for government announcements and commitment policy.