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Lunch Seminar: Antonio M. Conti - Banca d’Italia
Friday 31 March 2017, 01:00pm - 02:00pm

Sentiments in the Times of Debt

Abstract:
In spite of a longstanding interest for the role of confidence in macroeconomics, no widespread agreement exists on its quantitative relevance for economic fluctuations. We study this issue by means of a Structural VAR model of the US business cycle, allowing for time variation in the propagation of shocks and disentangling “sentiment” shocks from those related to news about future productivity. We find that the importance of sentiment shocks for variation in output, consumption, hours worked and financial conditions does indeed change over time. To shed light on this result we turn our attention to the transmission of sentiment shocks in state-dependance models. We show that excessive private and households debt strongly amplifies the effects of such shocks. Our findings are consistent with theoretical models embedding confidence as source of business cycle and call for a close evaluation of agents’ beliefs by policymarkers in times of financial stress.

   
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