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ecbwp1669

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Published by: TBP_Think_Tank on Apr 14, 2014
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07/26/2014

 
WORKING PAPER SERIES
NO 1669 / APRIL 2014
THE INTERNATIONAL DIMENSIONOF CONFIDENCE SHOCKS
Stéphane Dées and Jochen Güntner
In 2014 all ECB  publications feature a motif taken from the €20 banknote.
NOTE: 
This Working Paper should not be reported as representing the views of the European Central Bank (ECB). The views expressed are
those of the authors and do not necessarily reect those of the ECB.
 
© European Central Bank, 2014Address
Kaiserstrasse 29, 60311 Frankfurt am Main, Germany
Postal address
Postfach 16 03 19, 60066 Frankfurt am Main, Germany
Telephone
+49 69 1344 0
Internet
http://www.ecb.europa.eu
Fax
+49 69 1344 6000All rights reserved.
ISSN
1725-2806 (online)
EU Catalogue No
QB-AR-14-043-EN-N (online)Any reproduction, publication and reprint in the form of a different publication, whether printed or produced electronically, in whole or in part, is permitted only with the explicit written authorisation of the ECB or the authors.This paper can be downloaded without charge from http://www.ecb.europa.eu or from the Social Science Research Network electronic library at http://ssrn.com/abstract_id=2422794.Information on all of the papers published in the ECB Working Paper Series can be found on the ECB’s website,
http://www.ecb.europa.eu/pub/scientic/wps/date/html/index.en.html
Acknowledgements
The views expressed in this paper are those of the authors and do not necessarily reect the views of the European Central Bank (ECB)
or the Eurosystem. We thank Pooyan Amir Ahmadi and an anonymous referee of the ECB Working Paper Series as well as seminar  participants at the University of Bordeaux, the Ruhr-Univeristät Bochum, the University of Innsbruck and Johannes Kepler University Linz for helpful comments.
Stephane Dées (corresponding author)
European Central Bank; e-mail: stephane.dees@ecb.europa.eu
Jochen Güntner
Johannes Kepler University Linz
 
Abstract
Building on Beaudry, Nam and Wang (2011) – hereafter BNW –, we use survey data onconsumer sentiment in order to identify the causal effects of confidence shocks on real eco-nomic activity in a selection of advanced economies. Starting from a set of closed-economyVAR models, we show that these shocks have a significant and persistent impact on domesticconsumption and real GDP. In line with BNW, we find that confidence shocks explain a largeshare of the variance in real economic activity. At the same time, the shocks we identify aresignificantly correlated across countries. In order to account for common global componentsin international confidence cycles, we extend the analysis to a FAVAR model. This approachproves effective in removing the correlation in country-specific confidence shocks and in isolat-ing mutually orthogonal idiosyncratic components. As a result, the (domestic and cross-border)impacts of country-specific confidence shocks are smaller and their contribution to business cy-cle fluctuations is reduced, confirming the global dimension of confidence shocks. Overall, ourevidence shows that confidence shocks play some role in business cycle fluctuations. At the sametime, we show that confidence shocks have a strong global component, supporting their role ininternational business cycles.
Keywords
: Consumer Confidence, Consumption, International Linkages, Vector Autore-gression (VAR), Factor-Augmented VAR (FAVAR).
JEL Classification
 : C32, E17, E32, F41.
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