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The role of confidence shocks in business cycles and their global dimension

Author

Listed:
  • Stephane Dees

    (Larefi - Laboratoire d'analyse et de recherche en économie et finance internationales - UB - Université de Bordeaux)

Abstract

This paper uses survey data on consumer sentiment to identify the causal effects of confidence shocks on real economic activity in a selection of advanced economies. Starting from a set of closed-economy VAR models, we show that these shocks have a significant and persistent impact on domestic consumption and real GDP. In line with the existing literature, we find that confidence shocks explain a large share of the forecast error variance of real economic activity. At the same time, the shocks we identify are significantly correlated across countries. In order to account for common global components in international confidence cycles, we extend the analysis to a FAVAR model. This approach proves effective in removing the correlation in country-specific confidence shocks and in isolating mutually orthogonal idiosyncratic components. As a result, the (domestic and cross-border) effects of country-specific confidence shocks are attenuated and the forecast error variance contributions are reduced. Overall, our findings suggest that, while confidence shocks play an important role in domestic business cycle fluctuations, they contain a strong common component, which confirms their global dimension.

Suggested Citation

  • Stephane Dees, 2017. "The role of confidence shocks in business cycles and their global dimension," Post-Print hal-03879746, HAL.
    • Handle: RePEc:hal:journl:hal-03879746
    DOI: 10.1016/j.inteco.2017.03.004
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    Cited by:

    1. Daragh Clancy & Lorenzo Ricci, 2022. "Economic sentiments and international risk sharing," International Economics, CEPII research center, issue 169, pages 208-229.
    2. Allen, Thomas & Boullot, Mathieu & Dées, Stéphane & de Gaye, Annabelle & Lisack, Noëmie & Thubin, Camille & Wegner, Oriane, 2025. "Using short-term scenarios to assess the macroeconomic impacts of climate transition," Energy Economics, Elsevier, vol. 148(C).
    3. Daragh Clancy & Lorenzo Ricci, 2019. "Loss aversion, economic sentiments and international consumption smoothing," Working Papers 35, European Stability Mechanism.
    4. Stéphane Dees & Annabelle De Gaye & Camille Thubin & Oriane Wegner, 2023. "The transition to carbon neutrality: effects on price stability [Transition vers la neutralité carbone : quels effets sur la stabilité des prix ?]," Bulletin de la Banque de France, Banque de France, issue 245.
    5. Syed Ateeb Akhter Shah & Fatima Kaneez & Arshad Riffat, 2022. "Forecasting the GDP Growth in Pakistan: The Role of Consumer Confidence," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 27(1), pages 68-88, Jan-June.
    6. Alvarado, Mauricio & Rodríguez, Gabriel, 2025. "Time-varying effects of financial uncertainty shocks on macroeconomic fluctuations in Peru," Journal of International Money and Finance, Elsevier, vol. 152(C).

    More about this item

    Keywords

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    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
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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