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International confidence spillovers and business cycles in small open economies

Author

Listed:
  • Michał Brzoza-Brzezina

    (Narodowy Bank Polski and Warsaw School of Economics)

  • Jacek Kotłowski

    (Narodowy Bank Polski and Warsaw School of Economics)

Abstract

This paper draws from two observations in the literature. First, that shocks to entrepreneur or household confidence matter for economic outcomes. Second, that it is hard to explain the extent of cyclical comovement between economies taking into account their trade links only. We check empirically to what extent confidence fluctuations matter for business cycles and in particular for their comovement between economies. We focus on a large (euro area) and a small, nearby economy (Poland). Our results show that confidence fluctuations account for approximately 40% of business cycle fluctuations in the euro area. Spillovers of confidence shocks are also large. Our main finding is that the their direct impact (i.e. not via trade but through the cross-border spread of news and business sentiment) accounts for almost 40% of business cycle fluctuations in Poland.

Suggested Citation

  • Michał Brzoza-Brzezina & Jacek Kotłowski, 2018. "International confidence spillovers and business cycles in small open economies," NBP Working Papers 287, Narodowy Bank Polski.
    • Handle: RePEc:nbp:nbpmis:287
    Note: We would like to thank Paul Beaudry, Fabio Milani, Fabien Rondeau and Grzegorz Szafrański for useful discussions. Comments received at the Conference on Computational and Financial Econometrics, ISCEF Conference and the seminar at Narodowy Bank Polski are gratefully acknowledged as well.
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    Cited by:

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    2. Michał Brzoza‐Brzezina & Jacek Kotłowski & Grzegorz Wesołowski, 2022. "International information flows, sentiments, and cross‐country business cycle fluctuations," Review of International Economics, Wiley Blackwell, vol. 30(4), pages 1110-1147, September.
    3. Gene Ambrocio, 2022. "Euro-area business confidence and COVID-19," Applied Economics, Taylor & Francis Journals, vol. 54(43), pages 4915-4929, September.
    4. Gene Ambrocio, 2022. "Euro-area business confidence and COVID-19," Applied Economics, Taylor & Francis Journals, vol. 54(43), pages 4915-4929, September.

    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
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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