Working Paper: CEPR ID: DP15098
Authors: Morten O. Ravn; Evi Pappa; Andresa Helena Lagerborg
Abstract: We use fatalities in mass shootings in the U.S. as an instrument for autonomous declines in consumer confi dence to estimate the dynamic causal effects of sentiment shocks. Declining confi dence is recessionary and sets off a severe contraction in the labor market, while having less evident nominal effects. Sentiment shocks explain a non-negligible part of cyclical fluctuations. We demonstrate that in a model with heterogeneous agents, nominal rigidities and search-and-matching frictions, a wave of pessimism can take the economy from a normal state on a path towards a high-unemployment sunspot limit, inducing dynamics that resemble the empirical patterns.
Keywords: Consumer Confidence; Instrumental Variables; Demand Shocks; Incomplete Markets; Search and Matching
JEL Codes: E0; E32; C36
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| mass shooting fatalities (H56) | consumer confidence (D12) |
| consumer confidence (D12) | labor market contraction (J49) |
| consumer confidence (D12) | civilian unemployment rate (J64) |
| consumer confidence (D12) | industrial production (L69) |
| sentiment shocks (E32) | labor market indicators (J20) |
| sentiment shocks (E32) | financial market indicators (G10) |