The power of sentiment: Irrational beliefs of households and consumer loan dynamics

We examine whether household sentiment can explain fluctuations in newly issued consumer loans. construct a novel measure of using detailed data from the harmonized surveys conducted European countries. differentiate between rational sentiment, which mimics dynamics macroeconomic fundamentals, and irrational proxies households’ optimism/pessimism on top their rationally sourced beliefs. show that shocks to households do have measurable impact growth Specifically, we assert significantly positive role economic fundamentals identified literature. Moreover, closer examination reveals studied relationship is not symmetric over business cycle — effect present only periods country’s output well above its potential.