Confidence and monetary policy transmission

My study bridges the literature on the effects of monetary policy shocks on the real economy and the literature on the importance of confidence for aggregate business cycle fluctuations. This topic is particularly of interest against the background of a regained attention to include human psychology in (macro) economic modelling. The paper thus fits best in a session on the inclusion of psychological factors in applied modelling in economics. Alternatively, the paper would fit in a session on real-financial linkages. I am willing to chair a parallel session. VAR: impulse responses and variance decomposition. In more detail, my study considers in the context of monetary policy transmission not only the confidence of borrowers but also the confidence of lenders. The latter is also known as Keynes’ state of credit. Keynes concluded that a collapse in the confidence of either borrowers or lenders is sufficient to induce a downturn, but that a return to prosperity requires that both are in good repair. The empirical results for the euro area provide new evidence that psychological factors, such as confidence among borrowers and lenders, play an important role for monetary policy transmission and thus for economic growth. It stresses that growth is not only about economic fundamentals, but also about psychology. Analysts and policy makers in the public and private sector should thus closely monitor sentiment swings in the (non-)financial sector to ensure sufficient insight in the state of the economy.