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Unemployment Expectations and the Business Cycle

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Author Info

  • Daniel Louis Tortorice

    (Brandeis University)

Abstract

I compare unemployment expectations from the Michigan Survey of Consumers to VAR forecastable movements in unemployment. I document three key facts: First, one-half to one-third of the population expects unemployment to rise when it is falling at the end of a recession, even though the VAR predicts the fall in unemployment. Second, more people expect unemployment to rise when it is falling at the end of a recession than expect it to rise when it is rising at the beginning of a recession even though the VAR predicts these changes. Finally, the lag change in unemployment is almost as important as the VAR forecast in predicting the fraction of the population that expects unemployment to rise. Professional forecasters do not exhibit these discrepancies. Least squares learning or real time expectations do little to help explain these facts. However, delayed updating of expectations can explain some of these facts, and extrapolative expectations explains these facts best. Individuals with higher income or education are only slightly less likely to have expectations which differ from the VAR, and those whose expect more unemployment when the VAR predicts otherwise are 8-10 percent more likely to believe it is a bad time to make a major purchase.

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Bibliographic Info

Article provided by De Gruyter in its journal The B.E. Journal of Macroeconomics.

Volume (Year): 12 (2012)
Issue (Month): 1 ()
Pages: 1

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Handle: RePEc:bpj:bejmac:v:12:y:2012:i:1:n:1

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Web page: http://www.degruyter.com

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Related research

Keywords: consumer sentiment; business cycles; rational expectations;

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References

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  1. Athanasios Orphanides & Simon van Norden, 2001. "The Unreliability of Output Gap Estimates in Real Time," CIRANO Working Papers 2001s-57, CIRANO.
  2. Xavier Gabaix & David Laibson, 2002. "The 6D Bias and the Equity-Premium Puzzle," NBER Chapters, in: NBER Macroeconomics Annual 2001, Volume 16, pages 257-330 National Bureau of Economic Research, Inc.
  3. Croushore, Dean & Stark, Tom, 2001. "A real-time data set for macroeconomists," Journal of Econometrics, Elsevier, vol. 105(1), pages 111-130, November.
  4. Yuriy Gorodnichenko & Olivier Coibion, 2010. "What can survey forecasts tell us about informational rigidities?," 2010 Meeting Papers 277, Society for Economic Dynamics.
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Cited by:
  1. Andreas Fuster & Benjamin Hebert & David Laibson, 2011. "Natural Expectations, Macroeconomic Dynamics, and Asset Pricing," NBER Working Papers 17301, National Bureau of Economic Research, Inc.
  2. Schanne, Norbert, 2012. "The formation of experts' expectations on labour markets : do they run with the pack?," IAB Discussion Paper 201225, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany].
  3. Carlos Carvalho & Fernanda Nechio, 2012. "Do people undestand monetary policy?," Working Paper Series 2012-01, Federal Reserve Bank of San Francisco.

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