NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Tim Willems

IMF
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Institutional Affiliation: International Monetary Fund

NBER Working Papers and Publications

June 2018On the Macroeconomic Consequences of Over-Optimism
with Paul Beaudry: w24685
Is over-optimism about a country's future growth perspective good for an economy, or does over-optimism also come with costs? In this paper we document that recessions, fiscal problems, as well as Balance of Payment-difficulties are more likely to arise in countries where past growth expectations have been overly optimistic. We arrive at this conclusion by looking at the medium-run effects of instances of over-optimism or caution in IMF forecasts. To isolate the causal effect of over-optimism we take an instrumental variables approach, where we exploit variation provided by the pseudo-random allocation of IMF Mission Chiefs across countries. As a necessary first step, we document that IMF Mission Chiefs tend to systematically differ in their individual degrees of forecast-optimism or cauti...
 
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