Sentimental Business Cycles and the Protracted Great Recession

62 Pages Posted: 28 Dec 2017 Last revised: 29 Jan 2019

See all articles by Christos Makridis

Christos Makridis

Massachusetts Institute of Technology (MIT) - Sloan School of Management; Government of the United States of America - Council of Economic Advisors

Date Written: January 26, 2019

Abstract

Using newly licensed individual-level data from Gallup between 2008 and 2017, this paper provides microeconomic evidence that sentiments about economic activity played an important role in amplifying and propagating the Great Recession. First, after controlling for aggregate shocks, a 1pp rise in county employment and housing price growth is associated with a 0.30sd and 0.67sd rise in perceptions about the current state of the economy and a 0.12pp and 0.27pp rise in perceptions the economy is improving. Second, exploiting plausibly exogenous variation in the 2016 Presidential election, consumption of non-durable goods grew by 4.2% with a larger 10-12% increase among conservatives. The causal effect of sentiment on consumption is robust to three separate instrumental variables strategies: a state Bartik-like measure of gasoline price shocks, county fluctuations in daily temperature, and exposure to different housing price shocks through social networks. A back-of-the-envelope calculation suggests that the decline in sentiment can account for 34-68% of the decline in consumption during the Great Recession and an additional 14-43 months of delayed recovery.

Keywords: beliefs, business cycles, consumption, sentiments, well-being

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

Suggested Citation

Makridis, Christos, Sentimental Business Cycles and the Protracted Great Recession (January 26, 2019). Available at SSRN: https://ssrn.com/abstract=3092489 or http://dx.doi.org/10.2139/ssrn.3092489

Christos Makridis (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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Government of the United States of America - Council of Economic Advisors ( email )

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