Optimism, Pessimism, and Short-Term Fluctuations

Download or read book Optimism, Pessimism, and Short-Term Fluctuations written by Gabriel Di Bella and published by International Monetary Fund. This book was released on 2018-01-05 with total page 31 pages. Available in PDF, EPUB and Kindle. Book excerpt: Economic theory offers several explanations as to why shifting expectations about future economic activity affect current demand. Abstracting from whether changes in expectations originate from swings in beliefs or fundamentals, we test empirically whether more optimistic or 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 over the 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 accordingly over the two years following the shock in expectations. To provide a theoretical foundation to the empirical analysis, we also propose a simple Keynesian model that highlights the role of expectations about long-term output in determining short-term economic activity.