Growth Expectations, Undue Optimism, and Short-Run Fluctuations
CESifo, Munich, 2013
CESifo Working Paper No. 4548
We assess whether “undue optimism” (Pigou) contributes to business cycle fluctuations. In our analysis, optimism (or pessimism) pertains to total factor productivity, which determines economic activity in the long run. Optimism shocks are perceived changes in productivity that do not actually materialize. We develop a new strategy to identify optimism shocks in a VAR model. It is based on nowcast errors regarding current output growth, that is, the difference between actual growth and the real-time prediction of professional forecasters. We find that optimism shocks – in line with theory - generate a negative nowcast error, but simultaneously a positive short-run output response.
Fiscal Policy, Macroeconomics and Growth
Monetary Policy and International Finance