When Confidence Fails: Uncertainty and the State-Dependent Power of Expectations

Restoring economic confidence has long been viewed as a key objective of policy making, whereas its efficacy usually collapses when uncertainty surges. Using Chinese quarterly data from 2005 to 2023 in a multi-pillar empirical framework, this paper shows uncertainty governs the macroeconomic power of sentiment, revealing a stark but significant asymmetry: In low-uncertainty regimes, a positive confidence shock raises GDP by 0.9% over 12 quarters, but decreases GDP by 10.2% in high-uncertainty regimes, as transmission through expectations and credit disintegrates. Results also imply uncertainty acts as“gating mechanism”, making its reduction a precondition for effective policy intervention. JEL Codes: E32, E44, E61, C32