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Effects of fiscal consolidation on business confidence in the Euro Area

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  • Nektarios Michail
  • Christos Savva
  • Demetris Koursaros

Abstract

We employ a factor-augmented VAR (FAVAR) covering both domestic and international developments to examine the confidence effects of a fiscal shock, using a sample of six euro area countries. The results indicate that following a shock in total government expenditure, responses are country-specific, while a weak geographical pattern, i.e. a distinction between core and periphery countries can be observed. Overall, the confidence response is short-lived and returns to zero after a few quarters. Heterogeneity in country responses also indicates that the Bachmann and Sims (2012) conclusion suggesting the endogenous response of confidence explaining almost all of the fiscal-driven output expansion in recessions, may hold only in country-specific cases.

Suggested Citation

  • Nektarios Michail & Christos Savva & Demetris Koursaros, 2018. "Effects of fiscal consolidation on business confidence in the Euro Area," Economics and Business Letters, Oviedo University Press, vol. 7(2), pages 76-83.
    • Handle: RePEc:ove:journl:aid:12649
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