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

Objectives. 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 growt...

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Bibliographic Details
Published in:Social science quarterly 2015-12, Vol.96 (4), p.1027-1040
Main Authors: de Bondt, Gabe J., Schiaffi, Stefano
Format: Article
Language:English
Subjects:
Confidence
Economic crisis
Economic development
Economic growth
Euro
Eurozone
GDP
Gross Domestic Product
Indexes
Original Articles
Psychological aspects
Purchasing
Trust
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Summary:Objectives. 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. Methods. 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. Results. Confidence matters for economic growth, both in good and bad times. This result is robust across sample periods, models, and proxies for confidence. Conclusions. 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.
ISSN:0038-4941
1540-6237
DOI:10.1111/ssqu.12181