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Wishful Thinking in Macroeconomic Expectations

King King Li () and Bo Huang ()
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King King Li: Shenzhen University
Bo Huang: Chinese University of Hong Kong

No GRU_2021_015, GRU Working Paper Series from City University of Hong Kong, Department of Economics and Finance, Global Research Unit

Abstract: We conduct an online survey experiment to investigate determinants of macroeconomic expectations. We investigate the effect of probability overweighting, religiosity, ambiguity aversion, and time preference. We find that subjects exhibiting probability overweighting, having higher degree of religiosity, having lower discount factor are more optimistic on economic growth and income, while ambiguity averse subjects are more pessimistic about the impact of Covid-19 outbreak on the economic growth rate. We compute the forecast errors and estimate the proportion of forecasts with rounding and implausible values. We find that significant proportion of subjects have rather poor understanding on macroeconomic variables. Subjects with higher degree of religiosity, living in small towns and villages, and with higher subjective socioeconomic status have higher forecast errors, while subjects with better education have lower forecast errors. Overall, we find that subjects form optimistic expectations, supporting the implication of belief-based utility (Brunnermeier and Parker, 2005) and wishful thinking (Seybert and Bloomfield, 2009) on macroeconomic expectations.

Keywords: Macroeconomic Expectations; Belief-based Utility; Probability Overweighting; Ambiguity Aversion; Time Preference; Religiosity; Experiment (search for similar items in EconPapers)
JEL-codes: C93 D84 E21 E31 E71 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2021-05-14
New Economics Papers: this item is included in nep-exp, nep-mac and nep-upt
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