Effects of fiscal consolidation on business confidence in the Euro Area

Nektarios Michail, Christos Savva () and Demetris Koursaros ()

Economics and Business Letters, 2018, vol. 7, issue 2, 76-83

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.

Date: 2018
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