۱- Introduction

۲- Empirical strategy

۳- Stylized facts

۴- Results

۵- Illustrating the results with a “Keynesian” model

۶- Conclusions

References

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 optimism and pessimism about the economy trigger short-term fluctuations in private consumption and investment. Under the assumption that cyclical movements in private consumption and investment growth are exogenous to potential output growth forecasts far into the future, our results are consistent with the idea of private economic agents learning about future potential output growth and adjusting their current demand accordingly. We also propose a simple Keynesian model to illustrate that revisions in expected future income can affect short-term equilibria, in line with the results of the empirical analysis.

Introduction

The notion that changes in expectations about future economic activity affect current aggregate demand has a long tradition in macroeconomics. The vast literature about the impact of confidence on economic activity includes: (i) the view arguing that “animal spirits” (and “sunspots”) eventually lead to busts as they are not supported by fundamentals (Cass and Shell, 1983; Akerlof and Shiller, 2010; De Grauwe and Ji, 2016);1 (ii) the view for which the same waves of optimism and pessimism associated with “animal spirits” do not necessarily lead to busts, rather they lead to self-fulfilling changes in fundamentals (Acharya et al., 2017; Benhabib et al., 2016), as changes in expectations of some agents trigger the actions of rational agents exhibiting strategic complementarities (Weil, 1989; Cooper and John, 1988); and (iii) a view generally referred to as “news-driven business cycles”, which posits that agents become optimistic or pessimistic based on the imperfect (or noisy) information they gather about future developments. If the information is correct the boom lasts, but if it is incorrect or agents are overly optimistic, a bust would occur (Cochrane, 1994; Beaudry and Portier, 2004; 2006; Lorenzoni, 2009; Jaimovich and Rebelo, 2009; Beaudry et al., 2011; Schmitt-Grohé and Uribe, 2012; Blanchard et al., 2013; Forni et al., 2017).