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News Shocks, Consumer Confidence, and Business Cycles

This paper studies the dynamic effects of changes in consumer confidence on the macroeconomy of the US. I construct a new instrument based on non-economic news to identify exogenous changes in consumer confidence. I document all major non-economic news events for the 1969-2022 period and construct a relative positivity score for them by studying the public opinion polls around them. Diagnostic tests show that this instrument explains significant variation in consumer confidence and is uncorrelated with economic fundamentals. Using this instrument in a proxy-VAR shows that increase in consumer confidence causes a significant and persistent increase in consumption and output and a decrease in unemployment. I check the robustness of these results by constructing another instrument that uses data from the Survey of Professional Forecasters to measure the difference between actual and predicted values of economic fundamentals like output and inflation. Using this measure of unanticipated economic news in the empirical analysis confirms most of the baseline results.

Presenting Author: Syed Hussain