Wednesday, January 28, 2009

Animal Spirits

The Animal Spirits Page has constructed this measure using unemployment rates. I like the approach but am not convinced that unemployent rates can tell us everything. Likewise I am also skeptical of yield curve approaches and here is where perhaps psychometrics or factor analysis might lend to more insights.

I was reminded of these when Mark Thoma linked to Bob Shiller's piece on consumer confidence. Like Mark I do not believe that confidence is the cause of business cycles but I believe that it is a propagation mechanism. Once the Fed failed to contain the collapse of Lehman and AIG it began to spillover into the real sector. Until then I believed (with no evidence whatsoever) that the subprime problem could have been limited to a small sector of the economy. Perhaps an DSGE model of this might be helpful.

1 comment:

Benign Brodwicz said...

The proof will be in the pudding, as they say.