European Parliament Library

Optimism, Pessimism, and Short-Term Fluctuations, Gabriel Di Bella, Francesco Grigoli

Abstract
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
Table Of Contents
Cover -- Contents -- 1 Introduction -- 2 Long-term Output and Current Economic Conditions -- 2.1 A Simple Keynesian Model: The Setup -- 2.2 Expectations about Long-Term Output -- 2.3 Simulation -- 3 Empirical Strategy -- 3.1 Data -- 3.2 Empirical Model -- 4 Stylized Facts -- 5 Results -- 5.1 Baseline -- 5.2 Extensions -- 5.3 Robustness -- 6 Conclusions -- References -- A Country Groups -- B Data -- List of Figures -- 1 Expected Long-Term Growth and Short-Term Economic Performance -- 2 Revisions in Potential Output Growth Forecasts (Percent) -- 3 Revisions in Potential Output Growth Forecast Before and After the GFC (Percent) -- 4 Revisions in Potential Output Growth Forecasts and Consumption and Investment Forecast Error (Percent) -- 5 Responses to a One pp Upward Revision in the Potential Output Growth Forecast (Percent) -- List of Tables -- 1 Numerical Example -- 2 Summary Statistics of Revisions to Potential Output Growth Forecasts (Percent) -- 3 Baseline Estimations -- 4 Interactions -- 5 Controls -- 6 Robustness Checks -- 7 Alternative Estimators -- B.1 Data Sources
Language
eng
Literary Form
non fiction
Physical Description
1 online resource (32 pages)
Specific Material Designation
remote
Form Of Item
online
Isbn
9781484336847

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