Consumer Expectations and Cyclical Durations

Do variations in consumer expectations lead to changes in business-cycle durations? Intuitively, the answer is in the affirmative. In this paper it is postulated that expectations are self-fulfilling; optimistic sentiments postpone cyclical peaks and promote cyclical troughs, and pessimistic sentiments result in the opposite combination. First, it is shown that the hypothesis that consumer expectations do not Granger-cause cyclical duration is rejected. Survival analysis is then used to investigate the association between changes in consumer expectations and business-cycle durations. In particular, it is found that consumers' optimism associates with longer expansion durations and vice-versa