Optimism, Pessimism, and Short-Term Fluctuations

32 Pages Posted: 18 Jan 2018

See all articles by C. Gabriel Di Bella

C. Gabriel Di Bella

International Monetary Fund (IMF)

Francesco Grigoli

International Monetary Fund (IMF)

Date Written: January 2018

Abstract

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

Di Bella, C. Gabriel and Grigoli, Francesco, Optimism, Pessimism, and Short-Term Fluctuations (January 2018). IMF Working Paper No. 18/1. Available at SSRN: https://ssrn.com/abstract=3104567

C. Gabriel Di Bella (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Francesco Grigoli

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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