Optimism, Pessimism, and Short-Term Fluctuations

C. Di Bella () and Francesco Grigoli ()

No 2018/001, IMF Working Papers from International Monetary Fund

Abstract: Economic theory offers several explanations as to why shifting expectations about future economic activity affect current demand. Abstracting from whether changes in expectations originate from swings in beliefs or fundamentals, we test empirically whether more optimistic or pessimistic potential output forecasts trigger short-term fluctuations in private consumption and investment. Relying on a dataset of actual data and forecasts for 89 countries over the 1990-2022 period, we find that private economic agents learn from different sources of in- formation about future potential output growth, and adjust their current demand accordingly over the two years following the shock in expectations. To provide a theoretical foundation to the empirical analysis, we also propose a simple Keynesian model that highlights the role of expectations about long-term output in determining short-term economic activity.

Keywords: WP; economic activity; effective demand; price level; terms of trade; Animal spirits; expectations; fluctuations; optimism; pessimism; self-fulfilling; investment growth; utility function; consumption deflator; marginal utility; consumption growth; frequency distribution; growth equation; productivity decreases investment; money hoarding; Private consumption; Production growth; Consumption; Potential output; Private investment; Global (search for similar items in EconPapers)
Pages: 31
Date: 2018-01-05
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Citations: View citations in EconPapers (4)

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Journal Article: Optimism, pessimism, and short-term fluctuations (2019)
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