More than a Feeling: Confidence, Uncertainty and Macroeconomic Fluctuations

54 Pages Posted: 17 Sep 2017

See all articles by Laura Nowzohour

Laura Nowzohour

Graduate Institute of International and Development Studies (IHEID)

Livio Stracca

European Central Bank (ECB)

Date Written: September 12, 2017

Abstract

Economists, observers and policy-makers often emphasize the role of sentiment as a potential driver of the business cycle. In this paper we provide three contributions to this debate. First, we critically survey the existing literature on sentiment (considering both confidence and uncertainty) and economic activity. Second, we review existing empirical measures of sentiment, in particular consumer confidence, stock market volatility (SMV) and Economic Policy Uncertainty (EPU), on monthly data for 27 countries, 1985-2016. Third, we identify some new stylized facts based on international evidence. While different measures are surprisingly lowly correlated on average in each country, they are typically highly positively correlated across countries, suggesting the existence of a global factor. Consumer confidence has the closest co-movement with economic and financial variables, and most of the correlations are contemporaneous or forward-looking, consistent with the view that economic sentiment is indeed a driver of activity.

Keywords: animal spirits, confi dence, uncertainty, business cycles, dynamic correlations

JEL Classification: E32, E71, F44, G15, G41

Suggested Citation

Nowzohour, Laura and Stracca, Livio, More than a Feeling: Confidence, Uncertainty and Macroeconomic Fluctuations (September 12, 2017). ECB Working Paper No. 2100, Available at SSRN: https://ssrn.com/abstract=3036817 or http://dx.doi.org/10.2139/ssrn.3036817

Laura Nowzohour

Graduate Institute of International and Development Studies (IHEID) ( email )

Geneva Avenue de la Paix 11A
Geneva, 1202
Switzerland

Livio Stracca (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
0049 69 13440 (Phone)
0044 69 1344 6000 (Fax)

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