NBER Publications by Eric R. Sims

There seems to be a widespread belief among economists, policy-makers, and members of the media that the "confidence'" of households and businesses is a critical component in the transmission of fiscal policy shocks into economic activity. We take this proposition to the data using standard structural VARs with government spending and aggregate output augmented to include empirical measures of consumer or business confidence. We also estimate non-linear VAR specifications to allow for differential impacts of government spending in "normal'' times versus recessions. In normal times confidence does not react significantly to unexpected increases in government spending and spending multipliers are in the neighborhood of one; during recessions confidence rises and spending multipliers are ...

What is the impact of time-varying business uncertainty on economic activity? Using partly confidential business survey data from the U.S. and Germany in structural VARs, we find that positive innovations to business uncertainty lead to prolonged declines in economic activity. In contrast, their high-frequency impact is small. We find no evidence of the "wait-and-see"-effect – large declines of economic activity on impact and subsequent fast rebounds – that the recent literature associates with positive uncertainty shocks. Rather, positive innovations to business uncertainty have effects similar to negative business confidence innovations. Once we control for their low-frequency effect, we find little statistically or economically significant impact of uncertainty innovations on activity. ...

We implement a new approach for the identification of "news shocks" about future technology. In a VAR featuring a measure of aggregate technology and several forward-looking variables, we identify the news shock as the shock orthogonal to technology innovations that best explains future variation in technology. In the data, news shocks account for the bulk of low frequency variation in technology. News shocks are positively correlated with consumption, stock price, and consumer confidence innovations, and negatively correlated with inflation innovations. The disinflationary nature of news shocks is consistent with the implications of sensibly modified versions of a New Keynesian model.

Innovations to measures of consumer confidence convey incremental information about economic activity far into the future. Comparing the shapes of impulse responses to confidence innovations in the data with the predictions of a calibrated New Keynesian model, we find little evidence of a strong causal channel from autonomous movements in sentiment to economic outcomes (the "animal spirits" interpretation). Rather, these impulse responses support an alternative hypothesis that the surprise movements in confidence reflect information about future economic prospects (the "information" view). Confidence innovations are best characterized as noisy measures of changes in expected productivity growth over a relatively long horizon.