Getting Economic Expectations Right

Recent literature has emphasised the role of expectations for shaping the business cycle. Zeno Enders, together with Michael Kleemann (Ifo Institute) and Gernot Müller (University of Bonn), is focusing on the importance of "undue optimism or pessimism", i.e. the extent to which overly optimistic or pessimistic private-sector expectations about the current state of the economy trigger upswings or downswings in aggregate economic activity.

In previous work, the authors have found that a sizeable fraction of cyclical GDP movements can be traced to "undue optimism or pessimism", a concept introduced by Arthur Pigou in the 1920s. Many economic decisions, such as consumption and investment activities, crucially depend on expectations about the fundamentals of the economy. Since these decisions translate into different levels of aggregate demand, expectations concerning fundamentals will inevitably impact today's economic activity. Yet, as fundamentals are contemporaneously unobservable, expectations are sometimes wrong, seen from an ex-post perspective.

During his stay at CES, Zeno Enders will focus on refining the empirical methodology for measuring the real effects of wrong expectations. His other primary research interests are determinants of business cycles in open and closed economies, such as private-sector expectations, asset-price bubbles and monetary policy shocks.

Zeno Enders is professor at the University of Heidelberg. He holds a PhD from the European University Institute in Florence. After completing a post-doc visit at the Ente Luigi Einaudi in Rome, he was Assistant Professor at the University of Bonn. He assumed his current position at the University of Heidelberg in 2011. He is also a frequent visitor at policy institutions such as the IMF, the Board of Governors of the Federal Reserve System and the World Bank.