How Much Do Mood Swings Drive Business Cycles?
Every month, the Conference Board releases its consumer confidence index. Last month, confidence was up. The index is supposed to be a reading of how we feel about the current economic climate, a measurement of what Keynes referred to as our animal spirits. But while these surveys indicate how we’re reacting to the economy, they also influence it, creating a sort of self-reinforcing feedback loop. So, is the economy dictating our mood? Or is our mood dictating the economy?
A new working paper (pdf here) by Paul Beaudry, Deokwoo Nam, and Jian Wang attempts to untangle the two by asking whether (and if so how much?) mood swings drive business cycles: