Optimism, Pessimism, and Short-Term Fluctuations

IMF Working Papers, January 5, 2018

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Optimism, Pessimism, and Short-Term Fluctuations

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Bibliographic details

• Authors: Gabriel Di Bella, Francesco Grigoli
• Published: January 5, 2018
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781484336748.001

Research question and approach

• Objective: Test empirically whether more optimistic or pessimistic potential output forecasts trigger short-term fluctuations in private consumption and investment, abstracting from whether changes in expectations originate from swings in beliefs or fundamentals.
• Empirical scope:
  • Dataset covers actual data and forecasts for 89 countries.
  • Period: 1990-2022.
  • Adjustment horizon observed: over the two years following the shock in expectations.
• Theoretical contribution:
  • Proposes a simple Keynesian model that highlights the role of expectations about long-term output in determining short-term economic activity.

Key empirical findings

• Private economic agents learn from different sources of information about future potential output growth.
• Agents adjust their current demand (private consumption and private investment) accordingly.
• The adjustment in current demand occurs over the two years following the shock in expectations.

Theoretical framing

• The paper offers a simple Keynesian model to provide a theoretical foundation for the empirical analysis.
• The model emphasizes the role of expectations about long-term output in determining short-term economic activity.

Subjects and keywords (as provided)

• Subjects: 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

Source: IMF Working Papers — Optimism, Pessimism, and Short-Term Fluctuations (Gabriel Di Bella, Francesco Grigoli), January 5, 2018.

Content in this bundle

• Optimism, Pessimism, and Short-Term Fluctuations, WP/18/1, January 2018
  • Optimism, Pessimism, and Short-Term Fluctuations, WP/18/1, January 2018 (Markdown version)
  • Optimism, Pessimism, and Short-Term Fluctuations, WP/18/1, January 2018 (PDF)