Cross-border spillovers in confidence

The recent crisis has been characterised by a sizeable decline in consumption and in consumer confidence and by significant spillover effects across countries. However, the question of whether confidence indicators are useful predictors of consumption by carrying information beyond economic fundamentals remains open. Moreover, while there is evidence of significant cross-country financial spillovers, the role of the confidence channel for the transmission of shocks is relatively unexplored. This section addresses these issues by analysing the link between real consumption and consumer confidence and the role of confidence spillover effects in the euro area. Real consumption and consumer confidence in the euro area show a close correlation, as well as measures of confidence across a number of euro area countries. An econometric analysis is carried out in order to test whether the correlation stems from the information about economic fundamentals contained in the confidence indicators or whether the latter have an additional predictive power and to assess the existence of confidence spillovers. Measures of consumer confidence abroad appear to be meaningful predictors of domestic confidence and consumption, lending support to the hypothesis that there exist significant cross-country confidence spillovers.