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On self-fulfilling expectations

Simon Wren-Lewis at Oxford University says that if companies believe (whether rightly or not) that trend growth will be low, "then the need to invest to meet an expanding market largely goes away", so we'll get slow growth. "There's a self-fulfilling aspect to pessimism," says the Peterson Institute's Olivier Blanchard. Roger Farmer at UCLA has shown how declines in what Keynes called "animal spirits" can depress growth. And Christopher Gunn at Carleton University in Canada has shown how such expectations can drive not just demand but also productivity growth, because optimism about future demand can encourage companies to introduce new innovations and technology.

Such self-fulfilling expectations might be one reason why financial crises tend to depress economic growth for years afterwards. Such crises have a 'scarring' effect: the memory of them makes people scared to invest even long after they've passed.

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