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Journal of Economic Interaction and Coordination

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27-09-2022 | Regular Article

The persistence of economic sentiment: a trip down memory lane

Authors: Petar Sorić, Ivana Lolić, Marina Matošec

Published in: Journal of Economic Interaction and Coordination | Issue 2/2023

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Abstract

Although various indicators of economic sentiment are often assessed in macroeconomic studies, the generating process of economic sentiment itself is still a puzzle. This paper offers pioneer evidence on the persistence of economic sentiment. Applying a battery of fractional integration tests on the European Economic Sentiment Indicator (ESI) of all individual EU member states, we reveal that ESI is dominantly a long-memory process. This finding is robust across several estimators, and it fairly contradicts the conventional wisdom of ESI as a purely transitory macroeconomic shock. Further on, this is true for both core EU economies and new member states, although the later ones exhibit slightly longer memory. Finally, we reveal that the end of the Great Moderation era has increased ESI’s persistence, but the effect is only marginal. As it seems, a series of macroeconomic turbulences recorded after the global financial crisis has not initiated a significant shift in agents’ collective memory and ESI will likely keep its pivotal role in governing business cycles in the future.

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It should be mentioned that there is another branch of literature dealing with the influence of sentiment on financial market volatility within the framework of fractionally integrated conditionally heteroskedastic models. We treat this branch as a separate topic and do not assess it here in more detail, but interested readers can see, e.g., Ho et al. (2013) or Shi and Ho (2021).

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Title: The persistence of economic sentiment: a trip down memory lane
Authors: Petar Sorić
Ivana Lolić
Marina Matošec
Publication date: 27-09-2022
Publisher: Springer Berlin Heidelberg
Published in: Journal of Economic Interaction and Coordination / Issue 2/2023
Print ISSN: 1860-711X
Electronic ISSN: 1860-7128
DOI: https://doi.org/10.1007/s11403-022-00371-8

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