## On the Macroeconomic Consequences of Over-Optimism

_IMF Working Papers, May 30, 2018_

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## Bibliographic details
- Authors: Paul Beaudry, Tim Willems
- Published: May 30, 2018
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484354889.001

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### Research question and approach
- 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.

### Key findings
- 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.

### Mechanism and interpretation
- 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.

### Policy implications and recommendations
- 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.

### Publication and metadata
- 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

*IMF Working Paper No. 2018/122 by Paul Beaudry and Tim Willems, May 30, 2018.*

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_Source: https://www.imf.org/en/publications/wp/issues/2018/05/30/on-the-macroeconomic-consequences-of-over-optimism-45872_