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Sentimental Business Cycles

Wednesday 15 May 2019, 1.00PM to 2.00pm

Speaker(s): Morten Ravn (UCL)

Host: Paulo Santos-Monteiro

Meetings: If you would like a 1:1 with Morten Ravn please add your name to the doodle poll.

Abstract:  We use an IV framework to identify the dynamic causal effects of consumer sentiments on the aggregate U.S. economy. We suggest to instrument autonomous shocks to consumer confidence with fatalities in mass shootings in the U.S. We demonstrate that a decline in consumer confidence induces a rise in unemployment and a fall in aggregate activity that is accompanied by a monetary expansion. Sentiment shocks account for significant share of the forecast error variance in unemployment. We then construct an Heterogeneous Agents New Keynesian model with search and matching frictions and estimate the structural parameters with indirect inference. We argue that countercyclical endogenous income risk amplifies the impact of sentiment shocks.

Location: A/EW/104 Alcuin East Wing

Admission: All welcome