{
  "title": "On the Macroeconomic Consequences of Over-Optimism",
  "publication": "IMF Working Papers, May 30, 2018",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2018/05/30/on-the-macroeconomic-consequences-of-over-optimism-45872",
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  "summary": "Is over-optimism about a country's future growth perspective good for an economy, or does over-optimism also come with costs?",
  "sections": [
    {
      "heading": "Research question and approach",
      "content": "- Central question: Is over-optimism about a country's future growth perspective good for an economy, or does over-optimism also come with costs?\n- Empirical focus: medium-run effects of instances of over-optimism or caution in IMF forecasts.\n- Identification strategy: instrumental variables approach exploiting variation provided by the allocation of IMF Mission Chiefs across countries.\n- Preliminary empirical fact: IMF Mission Chiefs tend to systematically differ in their individual degrees of forecast-optimism or caution.\n- Outcome variables examined include recessions, fiscal problems, and Balance of Payment-difficulties."
    },
    {
      "heading": "Key findings",
      "content": "- Recessions, fiscal problems, and Balance of Payment-difficulties are more likely to arise in countries where past growth expectations have been overly optimistic.\n- The mechanism linking over-optimism to later recessions operates through higher debt accumulation, both public and private.\n- The evidence highlights the potency of unjustified optimism and the costs associated with unrealistic medium-term forecasts."
    },
    {
      "heading": "Mechanism and interpretation",
      "content": "- Documented channel: over-optimism → higher public and private debt accumulation → increased likelihood of recession and broader macroeconomic problems.\n- Implication: forecast optimism is not merely benign sentiment; it has material macroeconomic consequences via financial and fiscal behavior."
    },
    {
      "heading": "Policy implications and recommendations",
      "content": "- Forecasting practice: base economic forecasts upon realistic medium-term prospects to avoid adverse macroeconomic outcomes.\n- Institutional implication: recognize and account for systematic differences in forecast optimism across IMF Mission Chiefs when relying on team forecasts."
    },
    {
      "heading": "Publication and metadata",
      "content": "- Authors: Paul Beaudry, Tim Willems\n- Date: May 30, 2018\n- Series: Working Paper No. 2018/122\n- Issue: 122\n- Volume: 2018\n- Pages: 43\n- DOI: https://doi.org/10.5089/9781484354889.001\n- Stock No: WPIEA2018122\n- ISBN: 9781484354889\n- ISSN: 1018-5941\n\nIMF Working Paper No. 2018/122 by Paul Beaudry and Tim Willems, May 30, 2018.\n\n---\n\n Content in this bundle\n\n- On the Macroeconomic Consequences of Over-Optimism, WP/18/122, May 2018\n  - On the Macroeconomic Consequences of Over-Optimism, WP/18/122, May 2018 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - On the Macroeconomic Consequences of Over-Optimism, WP/18/122, May 2018 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2018/05/30/on-the-macroeconomic-consequences-of-over-optimism-45872"
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    "Authors: Paul Beaudry, Tim Willems",
    "Published: May 30, 2018",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781484354889.001",
    "Central question: Is over-optimism about a country's future growth perspective good for an economy, or does over-optimism also come with costs?",
    "Empirical focus: medium-run effects of instances of over-optimism or caution in IMF forecasts.",
    "Identification strategy: instrumental variables approach exploiting variation provided by the allocation of IMF Mission Chiefs across countries.",
    "Preliminary empirical fact: IMF Mission Chiefs tend to systematically differ in their individual degrees of forecast-optimism or caution.",
    "Outcome variables examined include recessions, fiscal problems, and Balance of Payment-difficulties.",
    "Recessions, fiscal problems, and Balance of Payment-difficulties are more likely to arise in countries where past growth expectations have been overly optimistic.",
    "The mechanism linking over-optimism to later recessions operates through higher debt accumulation, both public and private.",
    "The evidence highlights the potency of unjustified optimism and the costs associated with unrealistic medium-term forecasts.",
    "Documented channel: over-optimism → higher public and private debt accumulation → increased likelihood of recession and broader macroeconomic problems.",
    "Implication: forecast optimism is not merely benign sentiment; it has material macroeconomic consequences via financial and fiscal behavior.",
    "Forecasting practice: base economic forecasts upon realistic medium-term prospects to avoid adverse macroeconomic outcomes.",
    "Institutional implication: recognize and account for systematic differences in forecast optimism across IMF Mission Chiefs when relying on team forecasts.",
    "Authors: Paul Beaudry, Tim Willems",
    "Date: May 30, 2018",
    "Series: Working Paper No. 2018/122",
    "Issue: 122",
    "Volume: 2018",
    "Pages: 43",
    "DOI: https://doi.org/10.5089/9781484354889.001",
    "Stock No: WPIEA2018122",
    "ISBN: 9781484354889",
    "ISSN: 1018-5941",
    "**On the Macroeconomic Consequences of Over-Optimism, WP/18/122, May 2018**"
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