The Effect of Economic Sentiment on Consumption: Evidence from Social Networks

Abstract

This paper investigates the causal effect of economic sentiment on consumption using micro-data between 2008 and 2017. After showing that individuals update their beliefs about the national state of the economic in response to local housing and labor market fluctuations, I use the Social Connectedness Index (SCI) to construct an SCI-weighted index of housing price growth that captures individuals' exposure to housing market shocks in friends' zipcodes. Using plausibly exogenous variation in individuals' exposure to friends who experience heterogeneous housing price growth, I find that a standard deviation rise in economic sentiment is associated with a 0.16-0.22% rise in consumption of non-durables.

Keywords: Beliefs, Business Cycles, Consumption, Economic Sentiment, Social Networks

JEL Classification: D12, D14, E21, E32, G41