Growth Expectations, Undue Optimism, and Short-Run Fluctuations

52 Pages Posted: 26 Sep 2016

See all articles by Zeno Enders

Zeno Enders

University of Heidelberg

Michael Kleemann

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute

Gernot J. Müller

University of Tuebingen - Department of Economics

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Date Written: September 2016

Abstract

We assess the contribution of "undue optimism" (Pigou) to business-cycle fluctuations. In our analysis, optimism (or pessimism) pertains to total factor productivity which determines economic activity in the long run. We develop a new strategy to estimate the effects of optimism shocks - perceived changes in productivity which do not actually materialize. Specifically, we show that by including survey-based nowcast errors regarding current output growth in a VAR model, it is possible to identify optimism shocks. These shocks, in line with theory, generate negative nowcast errors, but raise economic activity in the short run. They account for up to 15 percent of short-run fluctuations.

Keywords: animal spirits, Business Cycles, noise shocks, nowcast errors, optimism shocks, Undue optimism, VAR

JEL Classification: E32

Suggested Citation

Enders, Zeno and Kleemann, Michael and Müller, Gernot J., Growth Expectations, Undue Optimism, and Short-Run Fluctuations (September 2016). CEPR Discussion Paper No. DP11521. Available at SSRN: https://ssrn.com/abstract=2843540

Zeno Enders (Contact Author)

University of Heidelberg ( email )

Michael Kleemann

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute ( email )

Poschinger Str. 5
Munich, 01069
Germany

Gernot J. Müller

University of Tuebingen - Department of Economics ( email )

Mohlstrasse 36
D-72074 Tuebingen, 72074
Germany

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