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A0524
Title: To what extent does sentiment drive real GDP Authors:  Jacek Kotlowski - SGH Warsaw School of Economics (Poland) [presenting]
Michal Brzoza-Brzezina - Narodowy Bank Polski (Poland)
Abstract: Two important observations in the literature are addressed. First, that shocks to expectations about future GDP (e.g. news about technology, sentiments about future demand) can exert a significant impact on the business cycle. Second, that in structural macroeconomic models it is hard to explain the extent of cyclical co-movement between economies taking into account their trade links only. We check empirically to what extent the observed correlation of business cycles can be explained by spillovers of news/ sentiments from a large (euro area) to a small (Poland) economy. We conduct the analysis using a structural VAR model and identify the shocks by imposing medium run restrictions. Our results show that sentiment demand shocks domestic and foreign explain over 35 percent of the forecast error variance of real GDP in the small economy in a four-year horizon. The other shocks to expectations (news about technology) are significantly less important. Foreign spillovers of expectations (technology and demand) account for almost 20 percent of GDP variance in Poland at all horizons.