Learning to Forecast the Hard Way -- Evidence from German Reunification
29 Pages Posted: 8 Mar 2013 Last revised: 24 Dec 2020
Date Written: May 8, 2019
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: Suggested Citation