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Unemployment Expectations and the Business Cycle

Daniel Tortorice ()

No 5, Working Papers from Brandeis University, Department of Economics and International Businesss School

Abstract: I compare unemployment expectations from the Michigan Survey of Consumers to VAR forecastable movements in unemployment. I document three key facts. First, one-half to one-third of the population expects unemployment to rise when it is falling at the end of a recession even though the VAR predicts the fall in unemployment. Second, more people expect unemployment to rise when it is falling at the end of a recession than expect it to rise when it is rising at the beginning of a recession even though the VAR predicts these changes. Finally, the lag change in unemployment is almost as important as the VAR forecast in predicting the fraction of the population that expects unemployment to rise. Professional forecasters do not make these mistakes. Least squares learning or real time expectations do little to help explain these facts. However, delayed updating of expectations can explain some of these facts and extrapolative expectations explains these facts best. Individuals with higher income or education are only slightly less likely to make these expectational errors and those who makes these errors are 8-10 percent less likely to believe it is a good time to make a major purchase.

Keywords: Consumer Sentiment; Rational Expectations; Business Fluctuations; Cycles (search for similar items in EconPapers)
JEL-codes: E32 E37 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2010-04, Revised 2011-03
New Economics Papers: this item is included in nep-lab and nep-mac
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Downloads: (external link)
http://www.brandeis.edu/economics/RePEc/brd/doc/Brandeis_WP05.pdf First version, 2010 (application/pdf)
http://www.brandeis.edu/economics/RePEc/brd/doc/Brandeis_WP05R.pdf Second version, 2011 (application/pdf)

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Journal Article: Unemployment Expectations and the Business Cycle (2012) Downloads
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