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Firms' Optimism and Pessimism

  • Rüdiger Bachmann
  • Steffen Elstner

Are firms' expectations systematically too optimistic or too pessimistic? Does it matter? We use micro data from the West German manufacturing subset of the IFO Business Climate Survey to infer quarterly production changes at the firm level and combine them with production expectations over a quarterly horizon in the same survey to construct series of quantitative firm-specific expectation errors. We find that depending on the details of the empirical strategy at least 6 percent and at most 34 percent of firms systematically over- or underpredict their one-quarter-ahead upcoming production. In a simple neoclassical heterogeneous-firm model these expectational biases lead to factor misallocations that cause welfare losses which in the worst case are comparable to conventional estimates of the welfare costs of business cycles fluctuations. In more conservative calibrations the welfare losses are even smaller.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18989.

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Date of creation: Apr 2013
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Handle: RePEc:nbr:nberwo:18989
Note: EFG ME PR
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  1. Ruediger Bachmann & Steffen Elstner & Eric R. Sims, 2010. "Uncertainty and Economic Activity: Evidence from Business Survey Data," NBER Working Papers 16143, National Bureau of Economic Research, Inc.
  2. Rüdiger Bachmann & Christian Bayer, 2011. "Uncertainty Business Cycles - Really?," NBER Working Papers 16862, National Bureau of Economic Research, Inc.
  3. Hassan, Tarek & Mertens, Thomas M., 2014. "The Social Cost of Near-Rational Investment," CEPR Discussion Papers 10007, C.E.P.R. Discussion Papers.
  4. Frank de Leeuw & Michael J. McKelvey, 1981. "Price Expectations of Business Firms," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(1), pages 299-314.
  5. Steve J. Davis & John Haltiwanger, 1991. "Gross Job Creation, Gross Job Destruction and Employment Reallocation," NBER Working Papers 3728, National Bureau of Economic Research, Inc.
  6. Souleles, Nicholas S, 2004. "Expectations, Heterogeneous Forecast Errors, and Consumption: Micro Evidence from the Michigan Consumer Sentiment Surveys," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(1), pages 39-72, February.
  7. Sascha O. Becker & Klaus Wohlrabe, 2007. "Micro Data at the Ifo Institute for Economic Research – The “Ifo Business Survey”, Usage and Access," Ifo Working Paper Series Ifo Working Paper No. 47, Ifo Institute for Economic Research at the University of Munich.
  8. Bovi, Maurizio, 2009. "Economic versus psychological forecasting. Evidence from consumer confidence surveys," Journal of Economic Psychology, Elsevier, vol. 30(4), pages 563-574, August.
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