51 Pages Posted: 21 Jun 2015
Date Written: June 19, 2015
We examine how consumption responds to changes in sentiment regarding government economic policy using cross-sectional variation across counties in the ideological predisposition of constituents. When the incumbent party loses a presidential election, individuals in counties more ideologically predisposed toward the losing party experience a dramatic and discontinuous relative decrease in optimism on government economic policy. Using the interaction of constituent ideology in a county with election timing as an instrument, we estimate the impact of government policy sentiment shocks on consumer spending, and we find a very small effect that cannot be statistically distinguished from zero. The small magnitude of the effect is estimated precisely. For example, we can reject the hypothesis that pessimism regarding government economic policy effectiveness during the Great Recession had as large an effect on consumption as the negative shock to household net worth coming from the collapse in house prices.
Keywords: consumer confidence, government, economic, policy, sentiment, news, noise, spending, consumption, elections, voting
JEL Classification: E20, E21, E60
Suggested Citation: Suggested Citation
Mian, Atif R. and Sufi, Amir and Khoshkhou, Nasim, Government Economic Policy, Sentiments, and Consumption (June 19, 2015). Fama-Miller Working Paper; Chicago Booth Research Paper. Available at SSRN: https://ssrn.com/abstract=2620828 or http://dx.doi.org/10.2139/ssrn.2620828