Motivated Beliefs in Macroeconomic Expectations

62 Pages Posted: 11 Feb 2021 Last revised: 23 May 2022

See all articles by Stefano Cassella

Stefano Cassella

Tilburg University- School of Economics and Management

Benjamin Golez

University of Notre Dame

Huseyin Gulen

Purdue University - Krannert School of Management

Peter Kelly

University of Notre Dame

Date Written: May 23, 2022

Abstract

Motivated beliefs are an important framework for understanding macroeconomic expectations. We
extend popular motivated belief models and show that they predict an upward sloping term structure of optimism (horizon bias). Analyzing professional forecasts over the past fifty years, we find that forecast errors exhibit both optimism bias and horizon bias. Further, consistent with the conceptual framework of BĂ©nabou (2015), we show that time-series variation in the optimism bias is related to theory-based drivers of motivated beliefs like uncertainty and anxiety. Finally, we find that forecasters react more strongly to good than bad news, consistent with motivated beliefs.

Keywords: Motivated beliefs, Optimal expectations, Wishful thinking, Economic forecasting, Economic models, Expectations, Optimism bias, Survey forecasts, Macroeconomic forecasts.

JEL Classification: C53, D83, D84, D9, E37, E7

Suggested Citation

Cassella, Stefano and Golez, Benjamin and Gulen, Huseyin and Kelly, Peter, Motivated Beliefs in Macroeconomic Expectations (May 23, 2022). Available at SSRN: https://ssrn.com/abstract=3759035 or http://dx.doi.org/10.2139/ssrn.3759035

Stefano Cassella (Contact Author)

Tilburg University- School of Economics and Management ( email )

Professor de Moorplein 521
Tilburg, 5037
Netherlands

Benjamin Golez

University of Notre Dame ( email )

256 Mendoza College of Business
Notre Dame, IN 46556-5646
United States
(574) 631-1458 (Phone)

HOME PAGE: http://business.nd.edu/BenGolez/

Huseyin Gulen

Purdue University - Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States

Peter Kelly

University of Notre Dame ( email )

251 Mendoza
South Bend, IN 46637
United States

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