DP11521 Growth expectations, undue optimism, and short-run fluctuations
|Author(s):||Zeno Enders, Michael Kleemann, Gernot Müller|
|Publication Date:||September 2016|
|Keyword(s):||animal spirits, Business Cycles, noise shocks, nowcast errors, optimism shocks, Undue optimism, VAR|
|Programme Areas:||Monetary Economics and Fluctuations|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=11521|
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 economic activity in the long run. We develop a new strategy to estimate the effects of optimism shocks - perceived changes in productivity which do not actually materialize. 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 up to 15 percent of short-run fluctuations.