Hostname: page-component-848d4c4894-tn8tq Total loading time: 0 Render date: 2024-06-22T20:36:57.005Z Has data issue: false hasContentIssue false

DOES FEAR LEAD TO RECESSIONS?

Published online by Cambridge University Press:  20 January 2015

Shiu-Sheng Chen*
Affiliation:
National Taiwan University
Yu-Hsi Chou
Affiliation:
Fu-Jen Catholic University
*
Address correspondence to: Shiu-Sheng Chen, Department of Economics, National Taiwan University, Social Science Building, No.1, Sec. 4, Roosevelt Road, Taipei, Taiwan; e-mail: sschen@ntu.edu.tw.

Abstract

This paper investigates the link between consumer pessimism and U.S. economic recessions empirically. First we use structural vector autoregressive models to identify negative structural shocks to consumer confidence, which are used as a proxy for recession fear. We then apply probit models and time-varying-transition-probability Markov-switching autoregressive models to investigate how the lack of consumer confidence affects the probability of recession. We find that recession fear leads to a higher probability of economic downturns. Furthermore, strong evidence exists that an increase in market pessimism may push the economy from an expansion state to a recession state. We also find weaker evidence suggesting that a lack of consumer confidence may trap the economy in the depressed regime longer. We conclude that a lack of confidence can push the economy into recession.

Type
Articles
Copyright
Copyright © Cambridge University Press 2015 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Akerlof, George and Shiller, Robert (2009) Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism. Princeton, NJ: Princeton University Press.Google Scholar
Barsky, Robert B. and Sims, Eric R. (2012) Information, animal spirits, and the meaning of innovations in consumer confidence. American Economic Review 102 (4), 13431377.CrossRefGoogle Scholar
Bernanke, Ben, Boivin, Jean, and Eliasz, Piotr S. (2005) Measuring the effects of monetary policy: A factor-augmented vector autoregressive (FAVAR) approach. Quarterly Journal of Economics 120 (1), 387422.Google Scholar
Blanchard, Olivier (1993) Consumption and the recession of 1990–1991. American Economic Review 83 (2), 270274.Google Scholar
Bram, Jason and Ludvigson, Sydney (1998) Does consumer confidence forecast household expenditure? A sentiment index horse race. Federal Reserve Bank of New York Economic Policy Review 4 (2), 5978.Google Scholar
Carroll, Christopher D., Fuhrer, Jeffrey C., and Wilcox, David W. (1994) Does consumer sentiment forecast household spending? If so, why? American Economic Review 84 (5), 13971408.Google Scholar
Chauvet, Marcelle and Guo, Jang-Ting (2003) Sunspots, animal spirits, and economic fluctuations. Macroeconomic Dynamics 7 (1), 140169.Google Scholar
Chauvet, Marcelle and Potter, Simon (2005) Forecasting recessions using the yield curve. Journal of Forecasting 24 (2), 77103.Google Scholar
Clements, Michael P. and Krolzig, Hans-Martin (2003) Business cycle asymmetries: Characterization and testing based on Markov-switching autoregressions. Journal of Business and Economic Statistics 21 (1), 196211.Google Scholar
Durland, J. Michael and McCurdy, Thomas H. (1994) Duration-dependent transitions in a Markov model of U.S. GNP growth. Journal of Business and Economic Statistics 12 (3), 279288.Google Scholar
Estrella, Arturo (1998) A new measure of fit for equations with dichotomous dependent variables. Journal of Business and Economic Statistics 16 (2), 198205.Google Scholar
Estrella, Arturo and Mishkin, Frederic S. (1998) Predicting U.S. recessions: Financial variables as leading indicators. Review of Economics and Statistics 80 (1), 4561.CrossRefGoogle Scholar
Filardo, Andrew J. (1994) Business-cycle phases and their transitional dynamics. Journal of Business and Economic Statistics 12 (3), 299308.Google Scholar
Filardo, Andrew J. (1999) How reliable are recession prediction models? Economic Review, Federal Reserve Bank of Kansas City (2), 35–55.Google Scholar
Filardo, Andrew J. and Gordon, Stephen F. (1998) Business cycle durations. Journal of Econometrics 85 (1), 99123.CrossRefGoogle Scholar
Garcia, Rene (1998) Asymptotic null distribution of the likelihood ratio test in Markov switching models. International Economic Review 39 (3), 763788.CrossRefGoogle Scholar
Garcia, Rene and Schaller, Huntley (2002) Are the effects of monetary policy asymmetric? Economic Inquiry 40 (1), 102119.CrossRefGoogle Scholar
Hamilton, James D. (1989) A new approach to the economic analysis of nonstationary time series and the business cycle. Econometrica 57, 357384.Google Scholar
Hamilton, James D. and Gabriel, Perez-Quiros (1996) What do the leading indicators lead? Journal of Business 69 (1), 2749.Google Scholar
Harrison, Sharon G. and Weder, Mark (2006) Did sunspot forces cause the Great Depression? Journal of Monetary Economics 53 (7), 13271339.Google Scholar
Howrey, E. Philip (2001) The predictive power of the index of consumer sentiment. Brookings Papers on Economic Activity 32 (2001–1), 175216.CrossRefGoogle Scholar
Lam, Pok-sang (2004) A Markov-switching model of GNP growth with duration dependence. International Economic Review 45 (1), 175204.CrossRefGoogle Scholar
Layton, Allan P. and Smith, Daniel R. (2007) Business cycle dynamics with duration dependence and leading indicators. Journal of Macroeconomics 29 (4), 855875.Google Scholar
Lorenzoni, Guido (2009) A theory of demand shocks. American Economic Review 99 (5), 20502084.Google Scholar
Lorenzoni, Guido (2011) News and aggregate demand shocks. Annual Review of Economics 3 (1), 537557.Google Scholar
Ludvigson, Sydney C. (2004) Consumer confidence and consumer spending. Journal of Economic Perspectives 18 (2), 2950.Google Scholar
Matsusaka, John G. and Sbordone, Argia M. (1995) Consumer confidence and economic fluctuations. Economic Inquiry 33 (2), 296318.Google Scholar
McConnell, Margaret M. and Perez-Quiros, Gabriel (2000) Output fluctuations in the United States: What has changed since the early 1980's? American Economic Review 90 (5), 14641476.Google Scholar
Negro, Marco Del (2001) Turn, turn, turn: Predicting turning points in economic activity. Economic Review, Federal Reserve Bank of Atlanta (2), 1–12.Google Scholar
Oh, Seonghwan and Waldman, Michael (1990) The macroeconomic effects of false announcements. Quarterly Journal of Economics 105 (4), 10171034.CrossRefGoogle Scholar
Raymond, Jennie E. and Rich, Robert W. (1997) Oil and the macroeconomy: A Markov state-switching approach. Journal of Money, Credit and Banking 29 (2), 193213.Google Scholar
Weder, Mark (1998) Fickle consumers, durable goods, and business cycles. Journal of Economic Theory 81 (1), 3757.Google Scholar
Wright, Jonathan H. (2006) The Yield Curve and Predicting Recessions. Finance and economics discussion series, Board of Governors of the Federal Reserve System, 2006–7.Google Scholar