Sentimental Business Cycles

Morten Ravn, Evi Pappa and Andresa Helena Lagerborg

No 15098, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We use fatalities in mass shootings in the U.S. as an instrument for autonomous declines in consumer confi dence to estimate the dynamic causal effects of sentiment shocks. Declining confi dence is recessionary and sets off a severe contraction in the labor market, while having less evident nominal effects. Sentiment shocks explain a non-negligible part of cyclical fluctuations. We demonstrate that in a model with heterogeneous agents, nominal rigidities and search-and-matching frictions, a wave of pessimism can take the economy from a normal state on a path towards a high-unemployment sunspot limit, inducing dynamics that resemble the empirical patterns.

Keywords: Consumer confidence; Instrumental variables; Demand shocks; Incomplete markets; Search and matching (search for similar items in EconPapers)
JEL-codes: C36 E0 E32 (search for similar items in EconPapers)
Date: 2020-07
New Economics Papers: this item is included in nep-cwa and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Journal Article: Sentimental Business Cycles (2023)
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