Learning to Forecast the Hard Way -- Evidence from German Reunification

29 Pages Posted: 8 Mar 2013 Last revised: 24 Dec 2020

See all articles by Thomas Triebs

Thomas Triebs

Loughborough University - School of Business and Economics

Justin Tumlinson

University of Exeter Business School

Multiple version iconThere are 2 versions of this paper

Date Written: May 8, 2019

Abstract

How do firms learn to forecast future business conditions after major structural changes to the economy? How long does it take? We exploit German Reunification as a natural experiment, where firms in the East are treated with ignorance about the distribution of market states, to test a Bayesian learning framework. As predicted, we find that Eastern firms initially forecast future business conditions worse than Western ones, but this gap gradually closes over the three quarters of a decade following Reunification. The slow convergence stems from differences in forward expectations rather than realized market conditions. These results warn of costly and drawn out firm-level adjustments to contemporary regime changes, such as the US-China Trade War, COVID19 and Brexit.

Keywords: Organizational Learning, Mental Models, Expectation Formation, Business Cycle Forecasting, Transition Dynamics

JEL Classification: D21, D83, E32, E37

Suggested Citation

Triebs, Thomas and Tumlinson, Justin, Learning to Forecast the Hard Way -- Evidence from German Reunification (May 8, 2019). Available at SSRN: https://ssrn.com/abstract=2229702 or http://dx.doi.org/10.2139/ssrn.2229702

Thomas Triebs

Loughborough University - School of Business and Economics ( email )

Epinal Way
Leics LE11 3TU
Leicestershire
United Kingdom

Justin Tumlinson (Contact Author)

University of Exeter Business School ( email )

Streatham Court
Xfi Building, Rennes Dr.
Exeter, EX4 4JH
United Kingdom

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
147
Abstract Views
1,427
Rank
286,427
PlumX Metrics