Working Paper: NBER ID: w23899
Authors: Jess Benhabib; Mark M. Spiegel
Abstract: We examine whether sentiment influences aggregate demand by studying the relationship between the Michigan Survey expectations concerning national output growth and future economic activity at the state level. We instrument for local sentiments with political outcomes, positing that agents in states with a higher share of congressmen from the political party of the sitting President will be more optimistic. This instrument is strong in the first stage, and our results confirm a positive relationship between sentiments and future state economic activity that is robust to a battery of sensitivity tests.
Keywords: Consumer Sentiment; Economic Activity; Instrumental Variables; Political Partisanship
JEL Codes: E20; E3; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Higher positive sentiment (D12) | Increased future state economic activity (H79) |
| Higher positive sentiment (D12) | Increased personal consumption expenditures (E20) |
| Sentiment changes (E32) | Overall economic activity at the state level (H79) |
| Political outcomes (D72) | Local sentiment (E66) |
| Past state growth (O49) | Current sentiment (E66) |