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DOES FEAR LEAD TO RECESSIONS?

Published online by Cambridge University Press:  20 January 2015

Shiu-Sheng Chen  and
Yu-Hsi Chou
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.
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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.

Keywords

Market PessimismFear of RecessionShock to Consumer ConfidenceBusiness Cycles
Type
Articles
Information
Macroeconomic Dynamics , Volume 20 , Issue 5 , July 2016 , pp. 1247 - 1263
Copyright
Copyright © Cambridge University Press 2015 

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