Macro Seminar - Silvia Miranda Agrippino (BoE)

The empirical literature on survey data rejects the central predictions of the theory of rational expectations almost universally. Individual beliefs tend to be too optimistic in good times, and too pessimistic in bad times. In this paper we study the aggregate consequences of this beliefs distortion by constructing an aggregate measure of overreaction, based on earnings forecasts. Overreaction behaves as a ‘bad news’ shock. Aggregate output and investment contract, the stock market falls, and credit spreads rise. These effects revert over time, suggesting the potential for overreaction to generate boom-bust cycle dynamics.

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Location: 321, Drayton House or Zoom.