Do mood swings drive business cycles and is it rational ? ∗

  title={Do mood swings drive business cycles and is it rational ? ∗},
  author={Paul Beaudry and D Nam},
Abstract This paper provides new evidence in support of the idea that bouts of optimism and pessimism drive much of US business cycles. In particular, we begin by using sign-restriction based identification schemes to isolate innovations in optimism or pessimism and we document the extent to which such episodes explain macroeconomic fluctuations. We then examine the link between these identified mood shocks and subsequent developments in fundamentals using alternative identification schemes (i… CONTINUE READING
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