The real effects of overconfidence and fundamental uncertainty shocks
No 37, Research Discussion Papers from Bank of Finland
This study provides estimates of the real effects of macro-uncertainty de- composed into fundamental and overconfidence bias components. Crucially, overconfidence biases lower ex-ante measures of uncertainty, while fundamen- tal uncertainty raises both ex-ante and ex-post measures. This distinction is useful since the estimates on the real effects of the overconfidence component of uncertainty mitigate endogeneity concerns. I first document evidence for overconfidence biases from survey density forecasts in the US survey of pro- fessional forecasters. Then, using a sign and zero restrictions identification scheme in a vector autoregression (VAR), I find that increases in fundamental uncertainty and declines in overconfidence tend to lower real activity.
JEL-codes: C32 D84 E37 (search for similar items in EconPapers)
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Working Paper: The real effects of overconfidence and fundamental uncertainty shocks (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:bof:bofrdp:037
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