Growth expectations, undue optimism, and short-run fluctuations

Müller, Gernot, Zeno Enders and Michael Kleemann
Authors registered in the RePEc Author Service: Gernot J. Müller

No 11521, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We assess the contribution of "undue optimism" (Pigou) to business-cycle fluctuations. In our analysis, optimism (or pessimism) pertains to total factor productivity which determines economic activity in the long run. We develop a new strategy to estimate the effects of optimism shocks - perceived changes in productivity which do not actually materialize. Specifically, we show that by including survey-based nowcast errors regarding current output growth in a VAR model, it is possible to identify optimism shocks. These shocks, in line with theory, generate negative nowcast errors, but raise economic activity in the short run. They account for up to 15 percent of short-run fluctuations.

Keywords: Undue optimism; Optimism shocks; Noise shocks; Animal spirits; Business cycles; Nowcast errors; Var (search for similar items in EconPapers)
JEL-codes: E32 (search for similar items in EconPapers)
Date: 2016-09
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Growth Expectations, Undue Optimism, and Short-Run Fluctuations (2021)
Working Paper: Growth expectations, undue optimism, and short-run fluctuations (2017)
Working Paper: Growth expectations, undue optimism, and short-run fluctuations (2015)
Working Paper: Growth Expectations, Undue Optimism, and Short-Run Fluctuations (2013)
Working Paper: Growth expectations, undue optimism, and short-run fluctuations (2013)
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