March 2023 issue contents
Global Confidence, Uncertainty, and Business Cycles

Jongrim Haa and Inhwan Sob


This paper investigates the role of global confidence cycles, me sured as the common factor across a wide range of survey-based business or consumer confidence indicators in global macroeconomic fluctuations over 1985–2019. We estimate a factor-augmented vector autoregression model, where global confidence shocks are identified through recursive restrictions. We report three main results. First, the global confidence cycles-in particular, that of consumer confidence-have played a key role in global business cycle fluctuations, explaining over a third of total variations. Second, while global business confidence shocks are in nature demand driven, global consumer confidence seems to reflect both demand and supply shocks, in line with "animal spirit" and "news" views on the relationship between confidence and economic activi- ties. Third, the shifts in global confidence are not necessarily accounted for by uncertainty shocks. Instead, confidence acts as an important channel in the transmission of uncer- tainty shocks. The results are robust to alternative identification using a novel set of external instruments, alternative variable orderings, and different uncertainty measures.

JEL Code: E32, F20, F42

 World Bank
Bank of Korea

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