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Measuring the effects of expectations shocks

Author

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  • Clements, Michael P.
  • Galvão, Ana Beatriz

Abstract

We seek to improve the measurement of the dynamic causal effects of expectation shocks by addressing issues related to data uncertainty. The expectations shocks are estimated in a mixed-frequency VAR model which incorporates monthly and quarterly economic and financial indicators. The VAR is estimated on real-time data to prevent the shocks being confounded with the effects of data uncertainty. But dynamic responses are calculated using a quarterly VAR for revised data, estimated using older vintages as instruments to account for the fact that ‘true values’ of key macroeconomic variables may never be observed. We show that expectations shocks – revisions in GDP expectations unrelated to changes in current economic fundamentals and orthogonalized to other, potentially related shocks – explain 7–8% of the two-year variation of output, investment, consumption and hours. This is similar to the proportion of business-cycle variation explained by monetary shocks, for example.

Suggested Citation

  • Clements, Michael P. & Galvão, Ana Beatriz, 2021. "Measuring the effects of expectations shocks," Journal of Economic Dynamics and Control, Elsevier, vol. 124(C).
    • Handle: RePEc:eee:dyncon:v:124:y:2021:i:c:s0165188921000105
    DOI: 10.1016/j.jedc.2021.104075
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    Citations

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    Cited by:

    1. Ahmed, M. Iqbal & Cassou, Steven P., 2021. "Asymmetries in the effects of unemployment expectation shocks as monetary policy shifts with economic conditions," Economic Modelling, Elsevier, vol. 100(C).
    2. Kruse-Becher, Robinson & Letixerant, Philip, 2025. "Oil price expectations in explosive phases," Energy Economics, Elsevier, vol. 152(C).
    3. Cascaldi-Garcia, Danilo, 2025. "Forecast revisions as instruments for news shocks," Journal of Monetary Economics, Elsevier, vol. 151(C).
    4. Clements, Michael P., 2025. "Inconsistent survey histograms and point forecasts revisited," Journal of Economic Behavior & Organization, Elsevier, vol. 236(C).
    5. Sidney M. Caetano & João H. G. Mazzeu, 2026. "Short-term inflation expectations evaluation in the presence of instabilities," Empirical Economics, Springer, vol. 70(2), pages 1-27, February.
    6. Klein, Tony, 2021. "Agree to Disagree? Predictions of U.S. Nonfarm Payroll Changes between 2008 and 2020 and the Impact of the COVID19 Labor Shock," QBS Working Paper Series 2021/07, Queen's University Belfast, Queen's Business School.
    7. An, Zidong & Sheng, Xuguang Simon & Zheng, Xinye, 2023. "What is the role of perceived oil price shocks in inflation expectations?," Energy Economics, Elsevier, vol. 126(C).
    8. repec:rim:rimwps:22-11 is not listed on IDEAS
    9. Jonathan Adams & Philip Barrett, 2024. "Shocks to Inflation Expectations," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 54, October.
    10. Antonova, Anastasiia & Matvieiev, Mykhailo, 2025. "News and firm entry: The role of the waiting option," Journal of Economic Dynamics and Control, Elsevier, vol. 171(C).
    11. Ma, Xiaohan & Samaniego, Roberto, 2022. "Business cycle dynamics when neutral and investment-specific technology shocks are imperfectly observable," Journal of Mathematical Economics, Elsevier, vol. 101(C).
    12. Klein, Tony, 2022. "Agree to disagree? Predictions of U.S. nonfarm payroll changes between 2008 and 2020 and the impact of the COVID19 labor shock," Journal of Economic Behavior & Organization, Elsevier, vol. 194(C), pages 264-286.

    More about this item

    Keywords

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    JEL classification:

    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C36 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Instrumental Variables (IV) Estimation

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