Does fear lead to recessions?

Shiu Sheng Chen, Yu Hsi Chou

Research output: Contribution to journalArticle

3 Citations (Scopus)

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.

Original languageEnglish
Pages (from-to)1247-1263
Number of pages17
JournalMacroeconomic Dynamics
Volume20
Issue number5
DOIs
Publication statusPublished - 2016 Jul 1
Externally publishedYes

Keywords

  • Business Cycles
  • Fear of Recession
  • Market Pessimism
  • Shock to Consumer Confidence

ASJC Scopus subject areas

  • Economics and Econometrics

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