On the Macroeconomic Consequences of Over-Optimism

Paul Beaudry and Tim Willems

American Economic Journal: Macroeconomics, 2022, vol. 14, issue 1, 38-59

Abstract: Analyzing International Monetary Fund (IMF) data, we find that overly optimistic growth expectations for a country induce economic contractions a few years later. To isolate the causal effect, we take an instrumental variable approach—exploiting randomness in the country allocation of IMF mission chiefs. We first document that IMF mission chiefs differ in their individual degrees of forecast optimism, yielding quasi-experimental variation in the degree of forecast optimism at the country level. The mechanism appears to run through excessive accumulation of debt (public and private). Our findings illustrate the potency of unjustified optimism and underline the importance of basing economic forecasts upon realistic medium-term prospects.

JEL-codes: C53 E23 E27 E32 F33 H63 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (12)

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Related works:
Working Paper: On the Macroeconomic Consequences of Over-Optimism (2018)
Working Paper: On the Macroeconomic Consequences of Over-Optimism (2018)
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DOI: 10.1257/mac.20190332

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