Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/158018 
Year of Publication: 
2017
Series/Report no.: 
Bundesbank Discussion Paper No. 11/2017
Publisher: 
Deutsche Bundesbank, Frankfurt a. M.
Abstract: 
We assess whether "undue optimism" (Pigou) contributes to business cycle fluctuations. In our analysis, optimism (or pessimism) pertains to total factor productivity which determines economic activity in the long run. Optimism shocks are perceived changes in productivity which do not actually materialize. We develop a new strategy to identify optimism shocks in a VAR model. It is based on nowcast errors regarding current output growth, that is, the difference between actual growth and the real-time prediction of professional forecasters. We find that optimism shocks - in line with theory - generate a negative nowcast error, but simultaneously a positive short-run output response.
Subjects: 
undue optimism
optimism shocks
noise shocks
animal spirits
business cycles
nowcast errors
VAR
JEL: 
E32
ISBN: 
978-3-95729-359-6
Document Type: 
Working Paper

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