Macroeconomic Measurement of Expectations versus Reality

This study analyzes the combined effects of “sensitivity of economic expectations” (responsiveness of expectations to the effective dynamics of the economy) and the “degree of self-fulfillment of expectations” (proportion of these expectations that are translated into reality). Their interactions (named “expectational impulse”) are revealed by the evolution of the concerned process (speed and direction). Unlike many previous studies that have focused on the specificity of this phenomenon in different business segments, our study examines its configuration at a macroeconomic level. We start from the premise that despite the heterogeneity of expectation forming mechanisms within the microenvironment, expectations manifest as a congruent economic zeitgeist at a macro level. Empirically, our study uses quarterly estimations of the economic sentiment index (ESIq), gross domestic product index in real terms (IGDPq), expectation sensitivity (mtzq), and self-fulfillment degree of expectations (sfdq) for all the European Union countries using the pre-Brexit format for the period 1995Q1–2020Q4. These data were processed using AR lag-distributed techniques. The key finding of the study is that when applied to successive post-sample simulations, all the experimented models generated steady-state type of estimates, defined as attractors. However, this view must be understood at a broader level as it is not only a matter of an equilibrium or normatively desirable levels of mtzq and sfdq, but more about their presumptive state provided the current dominant market behaviors do not change. In other words, the estimated attractors only represent signals concerning the economic expectations under a static business behavioral framework.