Some Bad News for Good News - Optimistic Forecasts Create Recessions A new IMF (

Question

Some Bad News for Good News - Optimistic Forecasts Create Recessions

A new IMF (International Monetary Fund) working paper says that over-optimistic economic growth forecasts could help cause recessions and fiscal problems. The IMF says that over optimistic forecasts lead the public and private sector to celebrate by borrowing more, causing debt accumulation that weakens the economic system, hampering growth. The IMF did say that they can create short term boosts to the economy, but damage in later years.

I need help answering the following:

1. Do you agree with the IMF on this? How big or small do you feel the effect would be from over-optimistic forecasts?

2. What do you feel could be done to curb over-optimistic forecasts?

3. Do you think pessimistic forecasts would have a similar scale effect?

Explanation / Answer

1) Yes I do agree with this view . Over optimistic forecast can create less savings habit in short run . People spend and borrow more since they think that the economy is going to grow in the future . So this can affect the economy in the long run . Savings and capital accumulated declines ver period and can lead to recession and negative growth in long run .

2) Real values of economic variables and their growth trends should be judged and forecasted to show the true picture of the economy .

3) Pessimistic forecast can have other affects like lesser investment in short run , lesser production growth in short run . This is because firms expect that slower growth in long run can hamper demand and prices of their products .

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