The persistence of economic sentiment: a trip down memory lane

• Published in: Journal of economic interaction and coordination 2023-04, Vol.18 (2), p.371-395
• Main Authors: Sorić, Petar, Lolić, Ivana, Matošec, Marina
• Format: Article
• Language: English
• Subjects: Business cycles; Computer Appl. in Social and Behavioral Sciences; Economic activity; Economic crisis; Economic Theory/Quantitative Economics/Mathematical Methods; Economics; Economics and Finance; Economists; Finance; Macroeconomics; Mathematical and Computational Physics; Memory; Regular; Regular Article; Securities markets; Theoretical
• ISSN: 1860-711X; 1860-7128
• DOI: 10.1007/s11403-022-00371-8

Although various indicators of economic sentiment are often assessed in macroeconomic studies, the generating process of economic sentiment itself is still a puzzle. This paper offers pioneer evidence on the persistence of economic sentiment. Applying a battery of fractional integration tests on the European Economic Sentiment Indicator (ESI) of all individual EU member states, we reveal that ESI is dominantly a long-memory process. This finding is robust across several estimators, and it fairly contradicts the conventional wisdom of ESI as a purely transitory macroeconomic shock. Further on, this is true for both core EU economies and new member states, although the later ones exhibit slightly longer memory. Finally, we reveal that the end of the Great Moderation era has increased ESI’s persistence, but the effect is only marginal. As it seems, a series of macroeconomic turbulences recorded after the global financial crisis has not initiated a significant shift in agents’ collective memory and ESI will likely keep its pivotal role in governing business cycles in the future.