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Sentimental Business Cycles

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  • Ravn, Morten
  • Pappa, Evi
  • Lagerborg, Andresa Helena

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.

Suggested Citation

  • Ravn, Morten & Pappa, Evi & Lagerborg, Andresa Helena, 2020. "Sentimental Business Cycles," CEPR Discussion Papers 15098, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:15098
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    3. Jonathan Adams & Philip Barrett, 2024. "Shocks to Inflation Expectations," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 54, October.
    4. Xu, Zhiwei & Zhou, Fei & Zhou, Jing, 2022. "Sentiments and real business cycles," Journal of Economic Dynamics and Control, Elsevier, vol. 141(C).
    5. Fève, Patrick & Collard, Fabrice & Guay, Alain, 2024. "Believe it or not, it’s all about Beliefs!," TSE Working Papers 24-1539, Toulouse School of Economics (TSE).
    6. Geiger, Martin & Güntner, Jochen, 2024. "The chronology of Brexit and UK monetary policy," Journal of Monetary Economics, Elsevier, vol. 142(C).
    7. Christos Mavridis & Orestis Troumpounis & Maurizio Zanardi, 2021. "Police Militarization and Local Elections," School of Economics Discussion Papers 0221, School of Economics, University of Surrey.
    8. Montone, Maurizio, 2022. "Does the U.S. president affect the stock market?," Journal of Financial Markets, Elsevier, vol. 61(C).
    9. Blanchflower, David G. & Bryson, Alex, 2023. "Labour Market Expectations and Unemployment in Europe," IZA Discussion Papers 15905, Institute of Labor Economics (IZA).
    10. Francesco Carbonero & Jeremy Davies & Ekkehard Ernst & Sayantan Ghosal & Leaza McSorley, 2021. "Anxiety, Expectations Stabilization and Intertemporal Markets: Theory, Evidence and Policy," Working Papers 2021_12, Business School - Economics, University of Glasgow.

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    More about this item

    Keywords

    Consumer confidence; Instrumental variables; Demand shocks; Incomplete markets; Search and matching;
    All these keywords.

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • C36 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Instrumental Variables (IV) Estimation

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