Confidence, Expectation, and China's Business Cycles?
- ZHU Zixiang, DENG Xiang
- Sichuan University, 610065.
Most existing news'shock research literature regards expectation as an unobservable latent variable, but in this paper, we try to examine its observability. We estimate China's potential output by mixing-frequency DFM method to represent the economic fundamentals. We find that China's economy began to decline before the 2008 financial crisis. Then we employ an imperfect information SVAR model to estimate the impact of news shocks and noise shocks based on a novel dynamic identification method. We find that the consumer confidence index contains the incorrect expectations of the major macro variables; in contrast, the business confidence indicator is a better one but contains many noise components. The news shocks account for nearly 60% of potential output variation, and 50% of GDP variation. The noise shock has a positive effect on macroeconomic variables, forming a “hump” effect, which has a short-term explanatory power for more than 8% of GDP. The poor performance of the consumer confidence index may be due to the disconnection between consumption and macro-economy. The conclusions still hold under large data sets, alternative indicators, fundamental test and other identification restrictions.
JEL：C32, E01, E32
- Confidence Indicator, Potential Output, News Shock, Imperfect Information