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Confidence, Animal Spirits and Business Cycles

Paper Session

Saturday, Jan. 6, 2018 2:30 PM - 4:30 PM

Marriott Philadelphia Downtown, Grand Ballroom Salon A
Hosted By: American Economic Association
  • Chair: Robert Shiller, Yale University

TFP, News, and “Sentiments”: The International Transmission of Business Cycles

Andrei Levchenko
,
University of Michigan, NBER, and CEPR
Nitya Pandalai-Nayar
,
Princeton University and University of Texas-Austin

Abstract

We propose a novel identification scheme for a non-technology business cycle shock, that we label “sentiment.” This is a shock orthogonal to identified surprise and news TFP shocks that maximizes the short-run forecast error variance of an expectational variable, alternatively a GDP forecast or a consumer confidence index. We then estimate the international transmission of three identified shocks – surprise TFP, news of future TFP, and “sentiment” – from the US to Canada. The US sentiment shock produces a business cycle in the US, with output, hours, and consumption rising following a positive shock, and accounts for the bulk of US short-run business cycle fluctuations. The sentiment shock also has a significant impact on Canadian macro aggregates. In the short run, it is more important than either the surprise or the news TFP shocks in generating business cycle comovement between the US and Canada, accounting for over 40% of the forecast error variance of Canadian GDP and over one-third of Canadian hours, imports, and exports. The news shock is responsible for some comovement at 5-10 years, and surprise TFP innovations do not generate synchronization. We provide a simple theoretical framework to illustrate how US sentiment shocks can transmit to Canada.

Understanding Global Confidence Cycles

Jongrim Ha
,
World Bank
Raju Huidrom
,
International Monetary Fund
M. Ayhan Kose
,
World Bank, Brookings Institution, and CEPR
Franziska Ohnsorge
,
World Bank

Abstract

We analyze the main cyclical features of consumer and business confidence. We first introduce a comprehensive database on consumer and business confidence at the quarterly frequency over the 1960-2016 period. The database covers business confidence for 65 countries and consumer confidence for 68 countries, with almost half of the countries in each series comprising of emerging and developing economies. A novel feature of the database is that confidence measures are standardized across counties so that it is suitable for cross-country analysis. Our results suggest that business and consumer confidence are procyclical and leading in nature. They also tend to exhibit sizeable comovement across countries suggesting the presence of a global confidence cycle. The pattern of comovement in confidence closely mirrors that of output comovement that is widely documented in the international business cycle literature.

Animal Spirits, Fundamental Factors and Business Cycle Fluctuations

Stephane Dées
,
Banque de France
Srečko Zimic
,
European Central Bank

Abstract

We explore empirically the role of noisy information in cyclical developments to separate fluctuations due to genuine changes in fundamentals from those driven by temporary animal spirits (or noise shocks). Exploiting the fact that the econometrician has a richer dataset in some dimensions than the consumers, we use a novel identification scheme in a structural VAR framework and show that noise shocks are important drivers of business cycle fluctuations. In particular, noise shocks play a large role in consumption expenditures showing how false perceptions about future fundamentals influence consumer behaviours. By contrast, interest rates are much less impacted by noise shocks.
Discussant(s)
Andre Kurmann
,
Drexel University
Francis X. Diebold
,
University of Pennsylvania and NBER
Yi Wen
,
Federal Reserve Bank of St. Louis
JEL Classifications
  • E3 - Prices, Business Fluctuations, and Cycles
  • F4 - Macroeconomic Aspects of International Trade and Finance