SENTIMENTS AND ECONOMIC ACTIVITY: EVIDENCE FROM US STATES

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...

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Bibliographic Details
Published in:The Economic journal (London) 2019-02, Vol.129 (618), p.715-733
Main Authors: Benhabib, Jess, Spiegel, Mark M.
Format: Article
Language:English
Subjects:
Aggregate demand
Economic activity
Economic theory
Optimism
Output
Political parties
Politics
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Summary: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.
ISSN:0013-0133
1468-0297
DOI:10.1111/ecoj.12605