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Animal spirits: the effect of economic expectations on economic output

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  • Joseph Bafumi

Abstract

The public is characterized as able forecasters of future economic performance. They engage in rational expectations. Empirical evidence exists to bolster the claim. This article considers the possibility that the public does more than predict economic output. They may engage in a self-fulfilling prophecy where belief about the future economy translates into personal financial behaviour (e.g., consumption and investment) that actually drives economic performance. After controlling for rational expectations with elite forecasts, leading indicators and past economic performance, it is shown that between 5% and one-third of the variance in economic output can be explained by prospective economic sentiment. This result has broad implications for electoral behaviour research.

Suggested Citation

  • Joseph Bafumi, 2011. "Animal spirits: the effect of economic expectations on economic output," Applied Economics, Taylor & Francis Journals, vol. 43(25), pages 3573-3589.
  • Handle: RePEc:taf:applec:v:43:y:2011:i:25:p:3573-3589
    DOI: 10.1080/00036841003670739
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