Asymmetric overreaction

Official URL: https://dx.doi.org/10.1016/j.euroecorev.2025.105153

Using a large cross-country dataset covering over 150 countries and more than 10 macroeconomic variables, this study examines the consistency of IMF World Economic Outlook (WEO) forecasts with the full information rational expectations (FIRE) hypothesis. We find that WEO forecasts exhibit an overreaction to news. This overreaction is asymmetric, with a stronger response to good news than to bad news, indicating excessive optimism among forecasters. Moreover, forecasts align more closely with the FIRE hypothesis during economic downturns or when a country is under an IMF program. Overreaction is more pronounced for macroeconomic variables with low persistence and for longer-horizon forecasts, consistent with recent theoretical models. Finally, we develop a model to explain how the state-dependent nature of attentiveness may drive this asymmetric overreaction.