Confidence And Macroeconomic Fluctuation

In several economic crises, such as the Mexican crisis, Southeast Asian economic crisis and subprime crisis in the United States, economists have found that the macroeconomic model developed for forecasting the financial crisis is helpless, the theory of rational expectations have been questioned. In contrast, confidence has played an important role in the crisis. Economics are more and more concerned about the role of confidence in economic fluctuation.In order to providing a basic support of theory, this paper summarizes the researches at home and abroad. In this paper, constructing the multiple linear regression model, vector auto regression model and DSGE model, by Grainger causality test, the impulse response and variance decomposition technology, we analyzed whether the confidence has effect on economic fluctuation, and how confidence influences the economic fluctuation.First, by causality test and linear regressions, it is showed that consumer confidence cannot but entrepreneur confidence can cause the economic fluctuation. Secondly, by constructing a five variable vector auto regression model containing the confidence, CPI, GDP, interest rate and government expenditures, we found the entrepreneur confidence has a significant impact on GDP and CPI, and the GDP and CPI can be best explained by confidence shock, especially to explain the proportion of CPI up to 50%. Finally, we formulated a simple DSGE model driven by confidence to analyze the mechanism of confidence effect of the economic fluctuation. The result showed that when the economic shock comes, the technology shock can explain almost all macroeconomic fluctuation. And the macroeconomic fluctuation can be best explained by confidence shock i n the long term.