Research / BFI Working PaperMar 20, 2023

Sentiment, Productivity, and Economic Growth

George M. Constantinides, Maurizio Montone, Valerio Potì, Stella Spilioti

Previous research finds correlation between sentiment and future economic growth, but disagrees on the channel that explains this result. In this paper, we shed new light on this issue by exploiting cross-country variation in sentiment and market efficiency. We find that sentiment shocks in G7 countries increase economic activity, but only temporarily and without affecting productivity. By contrast, sentiment shocks in non-G7 countries predict prolonged economic growth and a corresponding increase in productivity. The results suggest that sentiment can indeed create economic booms, but only in less advanced economies where noisy asset prices make sentiment and fundamentals harder to disentangle.

More Research From These Scholars

BFI Working Paper Jul 16, 2021

Welfare Costs of Idiosyncratic and Aggregate Consumption Shocks

George M. Constantinides
Topics:  Uncategorized