Confidence and the Propagation of Demand Shocks

George Marios Angeletos*, Chen Lian

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

3 Scopus citations


We revisit the question of why shifts in aggregate demand drive business cycles. Our theory combines intertemporal substitution in production with rational confusion, or bounded rationality, in consumption and investment. The first element allows aggregate supply to respond to shifts in aggregate demand without nominal rigidity. The second introduces a "confidence multiplier,"that is, a positive feedback loop between real economic activity, consumer expectations of permanent income, and investor expectations of returns. This mechanism amplifies the business-cycle fluctuations triggered by demand shocks (but not necessarily those triggered by supply shocks); it helps investment to comove with consumption; and it allows front-loaded fiscal stimuli to crowd in private spending.

Original languageEnglish (US)
Pages (from-to)1085-1119
Number of pages35
JournalReview of Economic Studies
Issue number3
StatePublished - May 1 2022


  • Aggregate demand
  • Business cycles
  • Confidence
  • E12
  • E13
  • E32
  • E70
  • Variable

ASJC Scopus subject areas

  • Economics and Econometrics


Dive into the research topics of 'Confidence and the Propagation of Demand Shocks'. Together they form a unique fingerprint.

Cite this