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The real effects of overconfidence and fundamental uncertainty shocks

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  • Ambrocio, Gene

Abstract

This study provides estimates of the real effects of macro-uncertainty de- composed into fundamental and overconfidence bias components. Crucially, overconfidence biases lower ex-ante measures of uncertainty, while fundamen- tal uncertainty raises both ex-ante and ex-post measures. This distinction is useful since the estimates on the real effects of the overconfidence component of uncertainty mitigate endogeneity concerns. I first document evidence for overconfidence biases from survey density forecasts in the US survey of pro- fessional forecasters. Then, using a sign and zero restrictions identification scheme in a vector autoregression (VAR), I find that increases in fundamental uncertainty and declines in overconfidence tend to lower real activity.

Suggested Citation

  • Ambrocio, Gene, 2017. "The real effects of overconfidence and fundamental uncertainty shocks," Research Discussion Papers 37, Bank of Finland.
  • Handle: RePEc:bof:bofrdp:037
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    JEL classification:

    • 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
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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