Growth expectations, undue optimism, and short-run fluctuations

Zeno Enders, Michael Kleemann and Gernot Müller

No 11/2017, Discussion Papers from Deutsche Bundesbank

Abstract: We assess whether "undue optimism" (Pigou) contributes to business cycle fluctuations. In our analysis, optimism (or pessimism) pertains to total factor productivity which determines economic activity in the long run. Optimism shocks are perceived changes in productivity which do not actually materialize. We develop a new strategy to identify optimism shocks in a VAR model. It is based on nowcast errors regarding current output growth, that is, the difference between actual growth and the real-time prediction of professional forecasters. We find that optimism shocks - in line with theory - generate a negative nowcast error, but simultaneously a positive short-run output response.

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: 2017
New Economics Papers: this item is included in nep-dcm and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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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 (2016)
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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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubdps:112017

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