News shocks and consumer expectations: evidence for Brazil

Consumer confidence/expectation indexes are frequently used by the media and the market in order to forecast the behavior of the economy. Agents’ expectations are believed to explain output and employment fluctuations, either moderate or drastic as the “.com†and the American subprime crisis. In Brazil, more attention has been drawn to this topic due to the recent economic crisis. The estimation of a VAR with Brazilian data for consumption, output and expectations suggests that innovations to the expectation indexes do have impact on aggregate consumption and GDP in the medium/long-run, as well as the indexes themselves. Inspired by this evidence, a DSGE model is used in order to assess how much of these impacts are due to anticipation of future economic fundamentals and how much are due to animal spirits. The results indicate that animal spirits and index-specific noise are responsible for a non-negligible amount of fluctuations up to 2 quarters, whereas news of future economic conditions prevail on lower frequencies.