Sentiments in the Times of Debt
Abstract:
In spite of a long
standing interest for the role of confidence in macroeconomics, no widespre
ad agreement exists on its quantitative relevance for economic fluctuations
. We study this issue by means of a Structural VAR model of the US business
cycle, allowing for time variation in the propagation of shocks and disent
angling “sentiment” shocks from those related to news about future producti
vity. We find that the importance of sentiment shocks for variation in outp
ut, consumption, hours worked and financial conditions does indeed change o
ver time. To shed light on this result we turn our attention to the transmi
ssion of sentiment shocks in state-dependance models. We show that excessiv
e private and households debt strongly amplifies the effects of such shocks
. Our findings are consistent with theoretical models embedding confidence
as source of business cycle and call for a close evaluation of agents’ beli
efs by policymarkers in times of financial stress.