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Confidence Matters for Current Economic Growth: Empirical Evidence for the Euro Area and the United States

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  • Gabe J. Bondt
  • Stefano Schiaffi

Abstract

type="main"> The literature typically undervalues the economy-wide importance of confidence, despite a renewed interest since the recent financial crisis in considering also psychological factors such as confidence. This study empirically assesses whether confidence matters for current real GDP growth in the euro area and the United States in addition to a widely applied and reliable predictor, the Purchasing Managers’ Index. We add confidence indicators to a regression of real GDP growth on the composite PMI output index and check for a different impact of confidence during recessions as opposed to expansions by applying smooth transition regressions. Confidence matters for economic growth, both in good and bad times. This result is robust across sample periods, models, and proxies for confidence. Confidence is essential for assessing the current stage of the business cycle. Analysts should therefore closely monitor sentiment swings, whereas private and public decisionmakers can boost growth by improving confidence in the economy.

Suggested Citation

  • Gabe J. Bondt & Stefano Schiaffi, 2015. "Confidence Matters for Current Economic Growth: Empirical Evidence for the Euro Area and the United States," Social Science Quarterly, Southwestern Social Science Association, vol. 96(4), pages 1027-1040, December.
    • Handle: RePEc:bla:socsci:v:96:y:2015:i:4:p:1027-1040
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    2. Gabe J. Bondt, 2019. "A PMI-Based Real GDP Tracker for the Euro Area," Journal of Business Cycle Research, Springer;Centre for International Research on Economic Tendency Surveys (CIRET), vol. 15(2), pages 147-170, December.
    3. Gabe de Bondt, 2017. "Confidence and monetary policy transmission," EcoMod2017 10197, EcoMod.
    4. Elena Shulyak, 2022. "Macroeconomic Forecasting Using Data from Social Media," Russian Journal of Money and Finance, Bank of Russia, vol. 81(4), pages 86-112, December.
    5. Ruwan Jayathilaka & Rishani Rathnayake & Bhakthi Jayathilake & Thanuja Dharmasena & Dananja Bodinayake & Deumi Kathriarachchi, 2023. "Exploring the growth direction: the impact of exchange rate and purchasing managers index on economic growth in Sri Lanka," Quality & Quantity: International Journal of Methodology, Springer, vol. 57(3), pages 2687-2703, June.
    6. Liudmila Kitrar & Tamara Lipkind, 2021. "Development Of Composite Indicators Of Cyclical Response In Business Surveys Considering The Specifics Of The ‘Covid-19 Economy’," HSE Working papers WP BRP 121/STI/2021, National Research University Higher School of Economics.
    7. Michael Lainé, 2018. "The Confidence Paradox: Can Confidence Account for Business Cycles?," Post-Print hal-04265052, HAL.

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