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Growth expectations, undue optimism, and short-run fluctuations

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  • Michael Kleemann

    (Deutsche Bundesbank)

  • Gernot Mueller

    (University of Bonn)

  • Zeno Enders

    (University of Heidelberg)

Abstract

We assess the contribution of "undue optimism" (Pigou) to business-cycle fluctuations. In our analysis, optimism (or pessimism) pertains to total factor productivity which determines long-run economic activity. We develop a new strategy to estimate the effects of optimism shocks - autonomous, but fundamentally unwarranted changes in the assessment of productivity. Specifically, we show that by including survey-based nowcast errors regarding current output growth in a VAR model, it is possible to identify optimism shocks. These shocks, in line with theory, generate negative nowcast errors, but raise economic activity in the short run. They account for about 30 percent of short-run fluctuations.

Suggested Citation

  • Michael Kleemann & Gernot Mueller & Zeno Enders, 2015. "Growth expectations, undue optimism, and short-run fluctuations," 2015 Meeting Papers 406, Society for Economic Dynamics.
    • Handle: RePEc:red:sed015:406
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    9. Riccardo M. Masolo & Alessia Paccagnini, 2019. "Identifying Noise Shocks: A VAR with Data Revisions," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 51(8), pages 2145-2172, December.
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    14. Ricco, Giovanni, 2015. "A new identification of fiscal shocks based on the information flow," Working Paper Series 1813, European Central Bank.
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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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