Expectation-Driven Boom-Bust Cycles

Using data from the Survey of Professional Forecasters, we find that a large fraction of analysts’ expectations about future economic growth is not due to technology or other shocks to fundamentals. The co-movement pattern associated with these changes is different from the one driven by fundamental shocks. Specifically, a non-fundamental improvement in expectations of future output predicts boom bust dynamics in the key macroeconomic aggregates. We offer a novel theory that explains why boom-bust dynamics emerge in response to non-fundamental expectations shocks and not to technology shocks.