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Unemployment Expectations and the Business Cycle

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  • Daniel Tortorice

    ()
    (Department of Economics, 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 make these mistakes. 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 make these expectational errors and those who makes these errors are 8-10 percent less likely to believe it is a good time to make a major purchase.

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File URL: http://www.brandeis.edu/departments/economics/RePEc/brd/doc/Brandeis_WP05.pdf
File Function: First version, 2010
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File URL: http://www.brandeis.edu/departments/economics/RePEc/brd/doc/Brandeis_WP05R.pdf
File Function: Second version, 2011
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Bibliographic Info

Paper provided by Brandeis University, Department of Economics and International Businesss School in its series Working Papers with number 05.

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Length: 45 pages
Date of creation: Apr 2010
Date of revision: Mar 2011
Handle: RePEc:brd:wpaper:05

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Postal: MS032, P.O. Box 9110, Waltham, MA 02454-9110
Web page: http://www.brandeis.edu/departments/economics/
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Related research

Keywords: Consumer Sentiment; Rational Expectations; Business Fluctuations; Cycles;

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References

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  1. Athanasios Orphanides & Simon Van_Norden, 2000. "The Reliability of Output Gap Estimates in Real Time," Econometric Society World Congress 2000 Contributed Papers 0768, Econometric Society.
  2. Xavier Gabaix & David Laibson, 2002. "The 6D Bias and the Equity Premium Puzzle," Harvard Institute of Economic Research Working Papers 1947, Harvard - Institute of Economic Research.
  3. Olivier Coibion & Yuriy Gorodnichenko, 2008. "What Can Survey Forecasts Tell Us About Informational Rigidities?," NBER Working Papers 14586, National Bureau of Economic Research, Inc.
  4. Croushore, Dean & Stark, Tom, 2001. "A real-time data set for macroeconomists," Journal of Econometrics, Elsevier, vol. 105(1), pages 111-130, November.
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Cited by:
  1. Michael J. Lamla & Lena Dräger & Damjan Pfajfar, 2013. "Are Consumer Expectations Theory-Consistent? The Role of Macroeconomic Determinants and Central Bank Communication," KOF Working papers 13-345, KOF Swiss Economic Institute, ETH Zurich.
  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. Fuster, Andreas & Herbert, Benjamin & Laibson, David I., 2011. "Natural Expectations, Macroeconomic Dynamics, and Asset Pricing," Scholarly Articles 10140029, Harvard University Department of Economics.
  4. Garz, Marcel, 2013. "Unemployment expectations, excessive pessimism, and news coverage," Journal of Economic Psychology, Elsevier, vol. 34(C), pages 156-168.
  5. Escobari Diego & Mollick André Varella, 2013. "Output growth and unexpected government expenditures," The B.E. Journal of Macroeconomics, De Gruyter, vol. 13(1), pages 33, September.
  6. Fernanda Nechio & Carlos Carvalho, 2012. "Do People Understand Monetary Policy?," 2012 Meeting Papers 426, Society for Economic Dynamics.
  7. Laibson, David I. & Fuster, Andreas & Mendel, Brock, 2010. "Natural Expectations and Macroeconomic Fluctuations," Scholarly Articles 9938147, Harvard University Department of Economics.

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