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Economic Brief

Jan. 29, 2021

Richmond Fed Brief Suggests That Pessimism Significantly Affects the Economy

Household pessimism and optimism drive substantial changes in economic outcomes, particularly in the labor market, according to the Richmond Fed’s latest Economic Brief.

Survey data show that the expectations of households often differ from formal economic forecasts. The researchers quantify these differences and explain them by developing a “theory of time-varying pessimism.” Embedding their new theory into a quantitative economic model, they find that fluctuations in pessimism have significant effects on macroeconomic measures, most notably the unemployment rate.

The Richmond Fed’s Economic Brief series provides essays on economic issues and trends. Sign up to receive an email notification when a new essay is posted.

As part of our nation’s central bank, the Richmond Fed is one of 12 regional Reserve Banks working together with the Board of Governors to support a healthy economy and deliver on our mission to foster economic stability and strength. We connect with community and business leaders across the Fifth Federal Reserve District — including the Carolinas, District of Columbia, Maryland, Virginia, and most of West Virginia — to monitor economic conditions, address issues facing our communities, and share this information with monetary and financial policymakers. We also work with banks to ensure they are operating safely and soundly, supply financial institutions with currency that’s fit for distribution, and provide a safe and efficient way to transfer funds through our nation’s payments system.


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