IMF Working Papers

Optimism, Pessimism, and Short-Term Fluctuations

Author/Editor:

Gabriel Di Bella ; Francesco Grigoli

Publication Date:

January 5, 2018

Electronic Access:

Free Download. Use the free Adobe Acrobat Reader to view this PDF file

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.

Series:

Working Paper No. 2018/001

Subject:

Consumption National accounts Potential output Private consumption Private investment Production Production growth