Linking business cycle with confidence cycle

Sylvain Leduc of FRBSF has this paper on the topic:

The idea that changes in consumer and business confidence can be important business cycle drivers is an old but controversial idea in macroeconomics. It assumes that confidence reacts not only to movements in economic fundamentals but is itself an independent cause of economic fluctuations distinct from those fundamentals. In recent decades, cycles of boom and bust in Japan, East Asia, and the United States have focused renewed attention on the question of confidence. These experiences suggest that optimism about the future helped fuel economic booms and that subsequent buildups of pessimism contributed to the busts. Moreover, these episodes fostered intense debate about the role of monetary policy in boom-and-bust cycles. Central banks have been sharply criticized for stoking the booms and inflating confidence by setting excessively accommodative monetary policy.

This Economic Letter considers the role of confidence in macroeconomic models. Specifically, the Letter examines professional economic forecasts to investigate whether relative optimism and pessimism—that is, expectations that good or bad times are ahead—may be important business cycle drivers. It also analyzes how monetary policy responds to buildups of confidence.

RBI has also started a new survey which aims to capture  business confidence in Trading Sector (wholesale/retail trading units in India).


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