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Does business confidence matter for investment?

Author

Listed:
  • Hashmat Khan

    (Carleton University
    Ottawa-Carleton GSE)

  • Santosh Upadhayaya

    (Carleton University
    Ottawa-Carleton GSE)

Abstract

Business confidence is a well-known leading indicator of future output. Whether it has information about future investment is, however, unclear. We determine how informative business confidence is for investment growth independently of other variables using US business confidence survey data for 1955Q1–2016Q4. Our main findings are: (i) business confidence has predictive ability for investment growth; (ii) remarkably, business confidence has superior forecasting power, relative to conventional predictors, for investment downturns over 1–3-quarter forecast horizons and for the sign of investment growth over a 2-quarter forecast horizon; and (iii) exogenous shifts in business confidence reflect short-lived non-fundamental factors, consistent with the ‘animal spirits’ view of investment. Our findings have implications for improving investment forecasts, developing new business cycle models, and studying the role of social and psychological factors determining investment growth.

Suggested Citation

  • Hashmat Khan & Santosh Upadhayaya, 2020. "Does business confidence matter for investment?," Empirical Economics, Springer, vol. 59(4), pages 1633-1665, October.
  • Handle: RePEc:spr:empeco:v:59:y:2020:i:4:d:10.1007_s00181-019-01694-5
    DOI: 10.1007/s00181-019-01694-5
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    More about this item

    Keywords

    Business confidence; Investment; Forecasting; Downturns; Directional forecasts;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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