Working Paper: NBER ID: w31031
Authors: George M. Constantinides; Maurizio Montone; Valerio Pot; Stella Spilioti
Abstract: Previous research finds correlation between sentiment and future economic growth, but disagrees on the channel that explains this result. In this paper, we shed new light on this issue by exploiting cross-country variation in sentiment and market efficiency. We find that sentiment shocks in G7 countries increase economic activity, but only temporarily and without affecting productivity. By contrast, sentiment shocks in non-G7 countries predict prolonged economic growth and a corresponding increase in productivity. The results suggest that sentiment can indeed create economic booms, but only in less advanced economies where noisy asset prices make sentiment and fundamentals harder to disentangle.
Keywords: sentiment; productivity; economic growth; market efficiency
JEL Codes: G10; G30; F36; F43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| market inefficiencies (G14) | stronger response to sentiment in less advanced economies (F69) |
| sentiment shocks in G7 countries (F31) | temporary increase in economic activity (E32) |
| sentiment shocks in G7 countries (F31) | no impact on productivity (F69) |
| sentiment shocks in non-G7 countries (F31) | prolonged economic growth (O49) |
| sentiment shocks in non-G7 countries (F31) | increase in productivity (O49) |
| sentiment shocks (E32) | changes in economic growth (O49) |
| sentiment shocks (E32) | changes in productivity (O49) |