On the Macroeconomic Consequences of Over-Optimism

Analyzing International Monetary Fund (IMF) data, we find that overly optimistic growth expectations for a country induce economic contractions few years later. To isolate the causal effect, take an instrumental variable approach—exploiting randomness in allocation of IMF mission chiefs. We first document chiefs differ their individual degrees forecast optimism, yielding quasi-experimental variation degree optimism at level. The mechanism appears to run through excessive accumulation debt (public and private). Our findings illustrate potency unjustified underline importance basing forecasts upon realistic medium-term prospects. (JEL C53, E23, E27, E32, F33, H63)