Sentimental Business Cycles

Andresa Lagerborg, Evi Pappa and Morten Ravn

The Review of Economic Studies, 2023, vol. 90, issue 3, 1358-1393

Abstract: We estimate the dynamic causal effects of consumer sentiment shocks in the US. We identify autonomous changes in survey evidence on consumer confidence using fatalities in mass shootings as an instrument. We find the instrument to be significant for an aggregate index of consumer expectations and also back up the identification scheme with micro evidence that exploits the geographical variation in mass shootings. Sentiment shocks have real macroeconomic effects. A negative sentiment shock is recessionary: It sets off a persistent decline in consumer confidence and induces a contraction in industrial production, private sector consumption and in the labour market, while having less evident nominal effects. Finally, sentiment shocks explain a non-negligible part of the cyclical fluctuations in consumer confidence and real macroeconomic aggregates.

Keywords: Consumer confidence; Instrumental variables; Dynamic causal effects of consumer sentiments; C36; E0; E32 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (3)

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Working Paper: Sentimental Business Cycles (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:oup:restud:v:90:y:2023:i:3:p:1358-1393.

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