The confidence channel of U.S. financial uncertainty: Evidence from industry-level data

Mohamad Karaki and Sandeep Kumar Rangaraju

Economic Modelling, 2023, vol. 129, issue C

Abstract: This paper investigates the role of consumer pessimism in amplifying U.S. financial uncertainty’s effects on sectoral industrial production. The existing literature largely focuses on aggregate data and uses measures of uncertainty that may be endogenous to economic activity. We use a measure of uncertainty that is exogenous to output and estimate a factor-augmented vector autoregressive model. We find heterogeneity in the responses of sectoral output and inflation to financial uncertainty shocks, which reveals important allocative effects. We then conduct a counterfactual analysis and find evidence that the effect of financial uncertainty on aggregate and sectoral output is amplified via a drop in consumer confidence, which reflects the importance of behavioral components in propagating uncertainty shocks. A historical decomposition analysis shows that financial uncertainty was not the main driver behind the 2008–2009 financial crisis and the COVID-19 recession. Nevertheless, in both recessions, financial uncertainty propagated via a drop in consumer confidence.

Keywords: Uncertainty shocks; Confidence channel; Transmission; Business cycles; FAVAR (search for similar items in EconPapers)
JEL-codes: C32 C53 E32 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:129:y:2023:i:c:s0264999323003693

DOI: 10.1016/j.econmod.2023.106557

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