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Global Confidence, Uncertainty, and Business Cycles

Author

Listed:
  • Jongrim Ha

    (World Bank)

  • Inhwan So

    (Bank of Korea)

Abstract

This paper investigates the role of global confidence cycles, me sured as the common factor across a wide range of survey-based business or consumer confidence indicators in global macroeconomic fluctuations over 1985–2019. We estimate a factor-augmented vector autoregression model, where global confidence shocks are identified through recursive restrictions. We report three main results. First, the global confidence cycles-in particular, that of consumer confidence-have played a key role in global business cycle fluctuations, explaining over a third of total variations. Second, while global business confidence shocks are in nature demand driven, global consumer confidence seems to reflect both demand and supply shocks, in line with "animal spirit" and "news" views on the relationship between confidence and economic activi- ties. Third, the shifts in global confidence are not necessarily accounted for by uncertainty shocks. Instead, confidence acts as an important channel in the transmission of uncer- tainty shocks. The results are robust to alternative identification using a novel set of external instruments, alternative variable orderings, and different uncertainty measures.

Suggested Citation

  • Jongrim Ha & Inhwan So, 2023. "Global Confidence, Uncertainty, and Business Cycles," International Journal of Central Banking, International Journal of Central Banking, vol. 19(1), pages 451-493, March.
    • Handle: RePEc:ijc:ijcjou:y:2023:q:1:a:10
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    References listed on IDEAS

    as
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    4. Husted, Lucas & Rogers, John & Sun, Bo, 2020. "Monetary policy uncertainty," Journal of Monetary Economics, Elsevier, vol. 115(C), pages 20-36.
    5. Colombo, Valentina, 2013. "Economic policy uncertainty in the US: Does it matter for the Euro area?," Economics Letters, Elsevier, vol. 121(1), pages 39-42.
    6. Dées, Stephane & Zimic, Srečko, 2019. "Animal spirits, fundamental factors and business cycle fluctuations," Journal of Macroeconomics, Elsevier, vol. 61(C), pages 1-1.
    7. Mark Gertler & Peter Karadi, 2015. "Monetary Policy Surprises, Credit Costs, and Economic Activity," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(1), pages 44-76, January.
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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F20 - International Economics - - International Factor Movements and International Business - - - General
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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