Growth Expectations Undue Optimism And Short Run Fluctuations

Download or read book Growth Expectations, Undue Optimism, and Short-Run Fluctuations written by Zeno Enders and published by . This book was released on 2017 with total page 52 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.