Mood Swings and Business Cycles: Evidence from Sign Restrictions

Deokwoo Nam and Jian Wang

Journal of Money, Credit and Banking, 2019, vol. 51, issue 6, 1623-1649

Abstract: This paper provides new evidence that bouts of optimism and pessimism are an important source of U.S. business cycles, using the identification schemes based on sign restrictions. We document that identified optimism and pessimism shocks account for about 30% of U.S. business‐cycle fluctuations in hours and output. In addition, our empirical findings are consistent with the intensive‐ and extensive‐margin adjustments in the U.S. labor market over business cycles, providing further support to optimism shocks being an important source of U.S. business cycles. The identified optimism shocks are at least partially rational as total factor productivity is found to rise 8–12 quarters after an initial bout of optimism. While this later finding is consistent with some previous findings in the news shock literature, we cannot rule out that such episodes reflect self‐fulfilling beliefs.

Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:wly:jmoncb:v:51:y:2019:i:6:p:1623-1649

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