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Unemployment Expectations and the Business Cycle

  • Daniel Tortorice

    ()

    (Department of Economics, Brandeis University)

I compare unemployment expectations from the Michigan Survey of Consumers to VAR forecastable movements in unemployment. I document three key facts. First, one-half to one-third of the population expects unemployment to rise when it is falling at the end of a recession even though the VAR predicts the fall in unemployment. Second, more people expect unemployment to rise when it is falling at the end of a recession than expect it to rise when it is rising at the beginning of a recession even though the VAR predicts these changes. Finally, the lag change in unemployment is almost as important as the VAR forecast in predicting the fraction of the population that expects unemployment to rise. Professional forecasters do not make these mistakes. Least squares learning or real time expectations do little to help explain these facts. However, delayed updating of expectations can explain some of these facts and extrapolative expectations explains these facts best. Individuals with higher income or education are only slightly less likely to make these expectational errors and those who makes these errors are 8-10 percent less likely to believe it is a good time to make a major purchase.

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File URL: http://www.brandeis.edu/departments/economics/RePEc/brd/doc/Brandeis_WP05.pdf
File Function: First version, 2010
Download Restriction: no

File URL: http://www.brandeis.edu/departments/economics/RePEc/brd/doc/Brandeis_WP05R.pdf
File Function: Second version, 2011
Download Restriction: no

Paper provided by Brandeis University, Department of Economics and International Businesss School in its series Working Papers with number 05.

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Length: 45 pages
Date of creation: Apr 2010
Date of revision: Mar 2011
Handle: RePEc:brd:wpaper:05
Contact details of provider: Postal: MS032, P.O. Box 9110, Waltham, MA 02454-9110
Web page: http://www.brandeis.edu/departments/economics/

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  1. Athanasios Orphanides & Simon van Norden, 1999. "The reliability of output gap estimates in real time," Finance and Economics Discussion Series 1999-38, Board of Governors of the Federal Reserve System (U.S.).
  2. Olivier Coibion & Yuriy Gorodnichenko, 2012. "What Can Survey Forecasts Tell Us about Information Rigidities?," Journal of Political Economy, University of Chicago Press, vol. 120(1), pages 116 - 159.
  3. Croushore, Dean & Stark, Tom, 2001. "A real-time data set for macroeconomists," Journal of Econometrics, Elsevier, vol. 105(1), pages 111-130, November.
  4. Xavier Gabaix & David Laibson, 2002. "The 6D Bias and the Equity Premium Puzzle," Harvard Institute of Economic Research Working Papers 1947, Harvard - Institute of Economic Research.
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