Speaker: Amir Sufi is the Chicago Board of Trade Professor of Finance at the University of Chicago Booth School of Business. His research focuses on finance and macroeconomics. More >>

Abstract: Estimating the consumption response to sentiment shocks, or shocks to consumer beliefs that are orthogonal to economic fundamentals, is difficult. This paper proposes a new methodology based on cross-sectional variation across U.S. counties in sentiment shocks. Views on the effectiveness of government economic policy across U.S. counties change dramatically and discontinuously when the incumbent party loses the presidency, with counties leaning Democratic becoming pessimistic in 2000 and counties leaning Republican becoming pessimistic in 2008. We use the interaction of constituent ideology in a county with election timing as an instrument to estimate the impact of government policy sentiment shocks on consumer spending. We find zero effect of government policy sentiment shocks on most measures of consumer spending in both 2000 and 2008, and the estimates are reasonably precise. For example, we can easily reject the hypothesis that pessimism regarding government economic policy effectiveness during the Great Recession had as large an effect on consumption as the negative shock to net worth coming from the collapse in house prices.

This talk held jointly with the International Monetary Fund.

Last Updated: Mar 30, 2015