Growth expectations, undue optimism, and short-run fluctuations

Arbeitspapier

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 which 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.

Object Details

• ISBN: 978-3-95729-359-6
• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Bundesbank Discussion Paper ; No. 11/2017

Classification and Topics

• Classification: Wirtschaft ; Business Fluctuations; Cycles
• Subject: undue optimism ; optimism shocks ; noise shocks ; animal spirits ; business cycles ; nowcast errors ; VAR

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Enders, Zeno ; Kleemann, Michael ; Müller, Gernot J.
• Event: Veröffentlichung
• (who): Deutsche Bundesbank
• (where): Frankfurt a. M.
• (when): 2017

Further information

• Handle: http://hdl.handle.net/10419/158018
• Last update: 10.03.2025, 11:46 AM CET