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Title: Measuring the effects of expectations shocks Authors:  Ana Galvao - University of Warwick (United Kingdom) [presenting]
Abstract: It is shown that expectation shocks revisions in expectations unrelated to economic fundamentals have positive significant effects on US economic activity. To measure the expectation shocks, we estimate a mixed-frequency VAR model that allows economic conditions in the current quarter to affect current-quarter GDP expectations. The model is estimated with real-time data so expectations shocks do not suffer a look-forward bias by incorporating future data revisions. Dynamic responses are estimated with the aid of a standard VAR. Expectations shocks explain 10\% of the two-year variation of output, investment, consumption and hours. We find that expectations shocks are correlated with alternative belief-based shocks, but nevertheless have significant positive short-run effects on investment and hours even when the effects of the other shocks are controlled for.