Working Paper: NBER ID: w21316
Authors: Atif Mian; Amir Sufi; Nasim Khoshkhou
Abstract: We examine how consumption responds to changes in sentiment regarding government economic policy using cross-sectional variation across counties in the ideological predisposition of constituents. When the incumbent party loses a presidential election, individuals in counties more ideologically predisposed toward the losing party experience a dramatic and discontinuous relative decrease in optimism on government economic policy. Using the interaction of constituent ideology in a county with election timing as an instrument, we estimate the impact of government policy sentiment shocks on consumer spending, and we find a very small effect that cannot be statistically distinguished from zero. The small magnitude of the effect is estimated precisely. For example, we can reject the hypothesis that pessimism regarding government economic policy effectiveness during the Great Recession had as large an effect on consumption as the negative shock to household net worth coming from the collapse in house prices.
Keywords: No keywords provided
JEL Codes: E20; E21; E60
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| government economic policy sentiment shocks (E60) | consumer spending (D12) |
| ideological predisposition of constituents (D72) | sentiment regarding government policy (E60) |
| ideological predisposition of constituents (D72) | consumer spending (D12) |
| election outcomes (K16) | sentiment regarding government policy (E60) |
| sentiment regarding government policy (E60) | consumer spending (D12) |