Optimism, Pessimism, and Short-Term Fluctuations
32 Pages Posted: 18 Jan 2018
Date Written: January 2018
Economic theory offers several explanations as to why shifting expectations about futureeconomic activity affect current demand. Abstracting from whether changes in expectationsoriginate from swings in beliefs or fundamentals, we test empirically whether more optimisticor pessimistic potential output forecasts trigger short-term fluctuations in private consumption and investment. Relying on a dataset of actual data and forecasts for 89 countries overthe 1990-2022 period, we find that private economic agents learn from different sources of in-formation about future potential output growth, and adjust their current demand accordinglyover the two years following the shock in expectations. To provide a theoretical foundation tothe empirical analysis, we also propose a simple Keynesian model that highlights the role ofexpectations about long-term output in determining short-term economic activity.
Keywords: Expectations, Animal spirits, fluctuations, optimism, pessimism, self-fulfilling
JEL Classification: E12, E32
Suggested Citation: Suggested Citation