Abstract: This paper measures the animal spirits of U.S. banks and asks whether they are an important determinant of credit conditions and source of business cycle fluctuations. I first construct a novel semi-structural measure of bank-level sentiment, revealing heterogeneous animal spirits across banks and common dynamics marked by surges in pessimism during crises and excessive optimism during periods of elevated asset prices. Using a structural BVAR that identifies bank sentiment alongside standard macroeconomic shocks, I find that bank sentiment shocks account for 24\% of fluctuations in output growth and 20\% in the policy rate. However, effects are time-varying and most acute in recessions when sentiment becomes a dominant source of volatility in real activity and financial conditions. These effects arise as pessimistic sentiment shocks act like a negative credit supply shock propagating primarily through the business lending channel, raising borrowing costs and tightening lending standards. Monetary policy can only partially offset these effects.

Abstract: This paper studies why uncertainty shocks have persistent effects on economic activity. I first document that shocks to uncertainty about non-financial productivity depress firm entry and raise market concentration for longer than standard transmission mechanisms can account for. I then develop a macroeconomic model with a new entrepreneurial funding channel, in which risk-averse investors become less willing to finance prospective entrepreneurs when uncertainty rises. Firm entry falls in response, creating a missing cohort of firms. Because there is no compensating rise in entry when uncertainty subsides, the missing cohort persists and the number of firms recovers only slowly. As a result, output is persistently dampened and market concentration among incumbent firms rises. Transitory uncertainty shocks can therefore generate long-lived changes in the size of the firm population and in market structure.