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

Loughborough University; Ludwig Maximilian University of Munich (LMU)

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)

Loughborough University ( email )

Ashby Road
Nottingham NG1 4BU
Great Britain
+44 (0) 2038051339 (Phone)

Ludwig Maximilian University of Munich (LMU) ( email )

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Munich, DE Bavaria 80539
Germany

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