Expectations matter for economic activity. To the extent that they are fundamentally unwarranted, they represent "undue optimism or pessimism" (Pigou, 1927). In this paper, we identify empirically the effect of undue optimism/pessism ("optimism shocks") on economic activity. In a first step, we...

Evidence from monetary VARs suggests that in the U.S., Canada, and the U.K. 7 the impact of monetary shocks on real house prices is about three to five times as large 8 as that on real GDP. Although these trade-offs are not manifestly unfavorable, in the 9 light of the large differences in the...

This paper studies the propagation and properties of a confidence shock in a structural vector autoregression (VAR) model with and without financial variables. The addition of a financial block does not considerably change the propagation and the contribution to the forecast error variance by...

I explore whether time-series methods exploiting the long-run equilibrium properties of the housing market might have detected the disequilibrium in U.S. house prices which pre-dated the Great Recession as it was building up. Based on real-time data, I show that a VAR in levels identified as in...

We assess the contribution of "undue optimism" (Pigou) to short-run fluctuations. In our analysis, optimism pertains to total factor productivity which determines economic activity in the long run, but is not contemporaneously observed by market participants. In order to recover optimism shocks...

Bivariate SVAR models employing long-run identifying restrictions are often used to investigate the source of business cycle fluctuations. Their advantage is the simplicity in use and interpretation. However, their low dimension may also lead to a failure of the identification procedure, with...

In this paper, we identify demand shocks that can have a permanent effect on output through hysteresis effects. We call these shocks permanent demand shocks. They are found to be quantitatively important in the United States, in particular when the sample includes the Great Recession. Recessions...