Affective Determinants of Consumer Expectations Bob Barsky Miles Kimball Noah Smith

Motivation Two Polar Views of Consumer Confidence in Macroeconomics Information Animal Spirits Issues in Cognitive Psychology Effect of affect on judgment Degree of persistence in “happiness shocks”

Information View Confidence shocks reflect genuine news about relevant future variables Link between confidence and economic behavior not causal

“Confidence shocks” have causal effects on economy “Animal Spirits” View Important movements in confidence that are exogenous to the macroeconomy “Confidence shocks” have causal effects on economy

Some General Questions Do changes in measured confidence reflect information or fluctuations in pure sentiment? Is the relationship between confidence and subsequent economic outcomes causal? What might “explain” variation in confidence? Time-series variation Cross-sectional variation at a point in time Individual innovations in panel data

Confidence Survey Questions Two Dimensions “You and your family living there” vs. “the economy as a whole Current actual situation compared to a year ago vs. expectations for next year vs. this year

Confidence Survey Question: Example “Now turning to business conditions in the country as a whole: Do you think that over the next five years we will have mostly good times, or mostly bad times with periods of widespread unemployment and depression, or what?”

Using Happiness as an Indicator of Affective Component of Confidence Time series co-variation in happiness measures and responses to the various confidence questions How is variation in confidence answers across individuals related to the happiness individual effect? How do changes in each individual’s answer to the confidence questions between the initial interview and the reinterview covary with happiness?

Negligible Serial Persistence in Daily Aggregate Happiness: 991 Daily Observations AC PAC Q-Stat Prob 1 0.070 0.070 4.8397 0.028 2 0.024 0.019 5.3901 0.068 3 0.076 0.073 11.106 0.011 4 -0.009 -0.020 11.191 0.025 5 0.011 0.010 11.302 0.046 6 -0.011 -0.018 11.430 0.076 7 0.035 0.039 12.664 0.081

Can’t Reject Constancy of National Happiness, 2005-2008, at Monthly Frequency: Residual From Regression Constant with Two S.D. Bounds

Major Movements in Bus5 and Bus12 Not Matched by Movements in Happiness

National Happiness (studentized) 1972-2006, from General Social Survey Neglibible variation even over this long period Strikingly, national mood was not depressed during 1970s “malaise” period nor ebullient in late 1980s or 1990 Celebrated relationship between happiness and inflation, unemployment apparently not first order

Individual Expectations Just as Related to Happiness Lagged As to Current Happiness Interpretation: