Growth Expectations, Undue Optimism, and Short-Run Fluctuations

55 Pages Posted: 2 Jun 2017

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

Multiple version iconThere are 3 versions of this paper

Date Written: 2017

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

JEL Classification: E32

Suggested Citation

Enders, Zeno and Kleemann, Michael and Müller, Gernot J., Growth Expectations, Undue Optimism, and Short-Run Fluctuations (2017). Bundesbank Discussion Paper No. 11/2017. Available at SSRN: https://ssrn.com/abstract=2977199

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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