|
|||||
|
|
Do shocks to animal spirits cause output fluctuations? |
|
| Authors: | Christopher Biolsi Bocong Du |
| Institution: | 1. Department of Economics, Western Kentucky University, Bowling Green, Kentucky;2. Discover Financial Services, Riverwoods, Illinois
The views in this article are solely those of the authors and do not represent the views of Discover Financial Services or any of its affiliates or subsidiaries. We are very thankful to the editor and to numerous anonymous referees. We are grateful to the Conference Board for sharing the consumer confidence data with us. We also thank conference participants at the 91st Annual Western Economics Association International meetings, the 87th Annual Southern Economic Association meetings, and the 2018 Kentucky Economic Association meetings. |
| Abstract: | We evaluate whether shocks to “animal spirits” affect real outcomes at business cycle frequencies, using data on consumer confidence and region- and state-level coincident activity indexes in a vector autoregression (VAR) with long run restrictions. We assume that animal spirits shocks do not affect the long run level of activity. Innovations in fundamentals explain most variation in the level of activity, but animal spirits have economically significant effects at business cycle frequencies. A positive innovation in animal spirits causes real activity to rise by between 0.2 and 0.6% in the medium term, and animal spirits may explain up to about half of real fluctuations in the medium run. |
| Keywords: | animal spirits confidence VAR |