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Title: Sentimental Business Cycles

Author(s): Andresa Helena Lagerborg, Evi Pappa and Morten O Ravn

Publication Date: July 2020

Keyword(s): Consumer confidence, Demand Shocks, incomplete markets, instrumental variables and Search and Matching

Programme Area(s): Monetary Economics and Fluctuations

Abstract: We use fatalities in mass shootings in the U.S. as an instrument for autonomous declines in consumer confi dence to estimate the dynamic causal effects of sentiment shocks. Declining confi dence is recessionary and sets off a severe contraction in the labor market, while having less evident nominal effects. Sentiment shocks explain a non-negligible part of cyclical fluctuations. We demonstrate that in a model with heterogeneous agents, nominal rigidities and search-and-matching frictions, a wave of pessimism can take the economy from a normal state on a path towards a high-unemployment sunspot limit, inducing dynamics that resemble the empirical patterns.

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Bibliographic Reference

Lagerborg, A, Pappa, E and Ravn, M. 2020. 'Sentimental Business Cycles'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=15098