Firms' Optimism and Pessimism
AbstractAre firms' expectations biased? Does it matter? We use micro data on firms' production expectations from the German IFO Business Climate Survey and compare them to realization data from the same survey. We then construct series of quantitative firm-specific expectation errors. We find that depending on the exact definition at least 6 percent and at most 35 percent of firms consistently over- or underpredict their one-quarter-ahead upcoming production. In a simple frictionless neoclassical heterogeneous firm model these expectational biases lead to factor misallocations that cause welfare losses that in the worst case are comparable to conventional estimates of the welfare costs of business cycles fluctuations. In more conservative calibrations the welfare losses are even smaller.
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Bibliographic InfoPaper provided by Society for Economic Dynamics in its series 2013 Meeting Papers with number 623.
Date of creation: 2013
Date of revision:
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Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
Web page: http://www.EconomicDynamics.org/society.htm
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Other versions of this item:
- D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
- D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
- E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
- E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
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