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Confidence and the transmission of macroeconomic uncertainty in U.S. recessions

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  • Fang Zhang

Abstract

This article studies the role of confidence in the transmission of uncertainty shocks during U.S. recessions. I use smooth-transition vector-autoregression (ST-VAR) to examine the regime-dependent effect of uncertainty shocks, and a counterfactual decomposition to isolate the role of confidence when the economy is in different regimes, recessions and non-recessions. I find that shutting down the confidence channel leads to greatly dampened and less persistent effects of uncertainty shocks, especially during recessions. I also find that the cross-regime difference in the role of confidence can largely explain the cross-regime short-run difference in the effects of uncertainty shocks.

Suggested Citation

  • Fang Zhang, 2017. "Confidence and the transmission of macroeconomic uncertainty in U.S. recessions," Applied Economics, Taylor & Francis Journals, vol. 49(29), pages 2893-2909, June.
    • Handle: RePEc:taf:applec:v:49:y:2017:i:29:p:2893-2909
    DOI: 10.1080/00036846.2016.1251554
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    Cited by:

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    4. Lien, Donald & Sun, Yuchen & Zhang, Chengsi, 2021. "Uncertainty, confidence, and monetary policy in China," International Review of Economics & Finance, Elsevier, vol. 76(C), pages 1347-1358.
    5. Ahmed, Walid M.A., 2020. "Stock market reactions to domestic sentiment: Panel CS-ARDL evidence," Research in International Business and Finance, Elsevier, vol. 54(C).

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