News shocks, consumer confidence and business cycles

Abstract We study the causal effects of consumer sentiment shocks on macroeconomic aggregates. By constructing a novel instrument based on major non‐economic news shocks in the USA over 1969–2022, and opinion polls around these events, we identify exogenous changes in consumer confidence. Our instrument explains significant variation in consumer confidence. Furthermore, using a proxy vector autoregression estimator and impulse responses, we document that a positive identified sentiment shock has strong and persistent expansionary effects on output, employment and consumption spending. The dynamic causal effects of sentimental shocks highlighted in this study are robust to various sensitivity analyses and alternative estimations.