More Than a Feeling: Confidence, Uncertainty, and Macroeconomic Fluctuations

Abstract

Economists, observers, and policy‐makers often emphasize the role of sentiment as a potential driver of the business cycle. In this paper, we provide three contributions to this debate. First, we give an overview of the recent literature on the nexus between sentiment (considering both confidence and uncertainty) and economic activity. Second, we review existing empirical measures of sentiment, in particular consumer confidence, stock market volatility (SMV) and Economic Policy Uncertainty (EPU), on monthly data for 27 countries, 1985–2016. Third, we identify some new stylized facts based on international evidence. While different measures are surprisingly lowly correlated on average in each country, they are typically highly positively correlated across countries, suggesting the existence of a global factor or sizeable international spillovers of sentiment. Consumer confidence has the closest co‐movement with economic and financial variables, and most of the correlations are contemporaneous or forward‐looking, consistent with the view that economic sentiment is indeed a driver of activity.

Monetary policy uncertainty, investor sentiment, and US stock market performance: New evidence from nonlinear cointegration analysis

“…The latter one can arise because of the variety of possible scenarios about future economic development and/or the scarcity of knowledge about the probability distribution of future outcomes. If the range of possible future outcomes is high, as investors' expectation of the outcomes is uncertain, they feel less confident in their trading ability (Nowzohour & Stracca, 2017). In the literature, the determinants of investor sentiment in financial markets and their impact on investor behaviour have attracted attention mainly after the bubble episodes.…”

Unconventional economic policies and sentiment: An international assessment

“…Sentiment indicators reflect the agents' interpretation (investors and consumers) of a given economic policy and of its possible consequences in terms of global investment and consumption (Nowzohour & Stracca, ). Focusing on the response of consumer confidence and investor sentiment during the last crisis episode is relevant for four main reasons.…”

Composite survey sentiment as a predictor of future market returns: Evidence for German equity indices

“…Therefore, one might object that survey-based sentiment contains not only the irrational part (sentiment in its true sense), but also the rational part, which is closely linked to macroeconomic fundamentals. Nowzohour and Stracca (2020) states that a central issue with using confidence and uncertainty measures of sentiment is the risk that these measures reflect actual news rather than "animal spirits", in which case it is only possible to observe shifts in fundamental factors.…”