Confidence shocks lead to economic booms followed by prolonged recessions.
Investor confidence shocks can have a big impact on the economy. When investors are overly confident, it can boost the economy at first but then lead to a long recession. These shocks played a significant role in the 2008 financial crisis. By studying data from 1984 to 2019, researchers found that confidence shocks had a sustained effect on the real economy. This suggests that changes in investor confidence can have lasting consequences on business cycles.