Optimism, Pessimism, and Short-Term Fluctuations

January 5, 2018

Preview Citation

Format: Chicago

Gabriel Di Bella, and Francesco Grigoli. Optimism, Pessimism, and Short-Term Fluctuations, (USA: International Monetary Fund, 2018) accessed September 19, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

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.

Subject: Consumption, National accounts, Potential output, Private consumption, Private investment, Production, Production growth

Keywords: Animal spirits, Consumption, Consumption deflator, Consumption growth, Economic activity, Effective demand, Expectations, Fluctuations, Frequency distribution, Global, Growth equation, Investment growth, Marginal utility, Money hoarding, Optimism, Pessimism, Potential output, Price level, Private consumption, Private investment, Production growth, Productivity decreases investment, Self-fulfilling, Terms of trade, Utility function, WP

Publication Details

Pages:

31
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2018/001
Stock No:

WPIEA2018001
ISBN:

9781484336748
ISSN:

1018-5941

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