Cecilia Ciocirlan1; Andreea Stancea2; 1 Institute for World Economy, Romania; 2 National School of Political and Administrative Studies, Romania
Macroeconomic expectations influence long-term output, investment, and employment through households’ behavior. Policymakers and politicians attempt to predict the behavior of citizens and voters. How individuals form expectations and perceive sovereign indebtedness brings into question public finance sustainability and incumbents’ credibility. Based on a cross-country survey in Central and Eastern European countries, we uncover the effects of economic knowledge on sovereign debt expectations. To test our hypotheses, we estimate an ordered probit regression model and rank our dependent variable into three levels of expectations (negative, moderate and positive). We find that knowledge about public debt increases the chances of forming negative expectations, while higher financial literacy tends to have the opposite effects. The results indicate that public debt expectations are driven by negative biases resulting from the lack of economic knowledge together with an insufficiency in understanding economic casual mechanisms. Financial literacy programs could benefit from including information about macroeconomics in curricula. Improving individual abilities to understand macroeconomic mechanisms, including public debt, has the potential to influence expectations and shift behaviors towards desired policy outcomes.