A sectoral perspective on the persistence of economic sentiment: mere transitory effect or a long memory process?

Abstract

Opposing the mainstream view that economic sentiment conveys information of purely short-term relevance, we assess the long memory characteristics of confidence indicators derived from Business and Consumer Surveys (BCS). We utilize a battery of fractional integration tests on five sectoral BCS indicators in 28 European economies. Conforming to social learning theory, we find that the examined confidence indicators in all five sectors exhibit noteworthy persistence. This finding stays intact in various robustness checks: across countries and for different fractional integration test specifications. Nevertheless, post hoc comparisons reveal that confidence in the construction and consumer sectors exhibits considerably more intensive persistence than in the industry, retail trade, and services. Since it is evident that shocks in economic sentiment have long-term or permanent effects, this calls for a revival of Keynesian ideas and the stabilization role of well-thought and timely countercyclical economic policy measures.