On the Macroeconomic Consequences of Over-Optimism
- (pp. 38-59)
AbstractAnalyzing International Monetary Fund (IMF) data, we find that overly optimistic growth expectations for a country induce economic contractions a few years later. To isolate the causal effect, we take an instrumental variable approach—exploiting randomness in the country allocation of IMF mission chiefs. We first document that IMF mission chiefs differ in their individual degrees of forecast optimism, yielding quasi-experimental variation in the degree of forecast optimism at the country level. The mechanism appears to run through excessive accumulation of debt (public and private). Our findings illustrate the potency of unjustified optimism and underline the importance of basing economic forecasts upon realistic medium-term prospects.
CitationBeaudry, Paul, and Tim Willems. 2022. "On the Macroeconomic Consequences of Over-Optimism." American Economic Journal: Macroeconomics, 14 (1): 38-59. DOI: 10.1257/mac.20190332
- C53 Forecasting Models; Simulation Methods
- E23 Macroeconomics: Production
- E27 Macroeconomics: Consumption, Saving, Production, Employment, and Investment: Forecasting and Simulation: Models and Applications
- E32 Business Fluctuations; Cycles
- F33 International Monetary Arrangements and Institutions
- H63 National Debt; Debt Management; Sovereign Debt
IMF forecast accuracy does not affect growth outcomes
I demonstrate this more formally in the attached note. I conclude that there is no evidence that growth outcomes are affected by WEO forecast accuracy. I also attach a revised dataset that includes greater detail on the WEO forecast errors and the Stata do file used to generate the estimates reported in my note.