Economic sentiment impact on macroeconomic dynamics in emerging market economies

Abstract:

Economic and investor sentiment has proven to play a substantial role in business cycle uctuations with an important inuence on the boom-and- bust type behavior of crises. In this paper, we analyze economic sentiment to assess its dynamics on the macro variables of several emerging market economies. We _rst estimate a spillover index and _nd that contagion is a signi_cant driver of sentiment across EU countries. Also, in line with pre- vious _ndings, we _nd that a positive shock in economic sentiment leads to an increase in output and stock market growth in all chosen countries, the impact varying across regions. Furthermore, by implementing a Thresh- old VAR methodology, we see that there exist asymmetric e_ects in the transmission of sentiment across macroeconomic variables, depending on the direction of the shock. This paper contributes to a growing body of literature in the ex-post behavioral analysis approach on macroeconomic and stock market dynamics.