Working Paper

Sentiments and Economic Activity: Evidence from U.S. States

Abstract: Using data from the Michigan Survey, we find a strong relationship between expectations concerning national output growth and future state economic activity. This linkage suggests that sentiment influences aggregate demand. This relationship is robust to a battery of sensitivity tests. However, national sentiment is also positively related to past state economic activity. We therefore turn to instrumental variables, positing that agents in states with a higher share of congressmen from the political party of the sitting President will be more optimistic. This instrument is strong in the first stage, and confirms the relationship between sentiment and future state economic activity.

JEL Classification: E20; E32;

https://doi.org/10.24148/wp2016-19

Bibliographic Information

Provider: Federal Reserve Bank of San Francisco

Part of Series: Working Paper Series

Publication Date: 2016-05-03

Number: 2016-19

Pages: 40 pages