Euro Area Business Confidence and Covid-19

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Title: Euro Area Business Confidence and Covid-19
Author: Ambrocio, Gene
Organization: Bank of Finland
Series: Bank of Finland Research Discussion Papers
Series number: 4/2021
Year of publication: 2021
Publication date: 15.3.2021
Pages: 24
Subject (yso): euroalue; yritykset; pandemiat; taloudelliset vaikutukset; liiketoiminta; yritystoiminta; odotukset; indikaattorit; indeksit
Keywords: COVID-19; kuluttajien luottamus; yritysten luottamus
JEL: E23; E66; E71; I12
Other keywords: business confidence; survey expectations; Covid-19
Abstract: I study the effects of the Covid-19 pandemic on business confidence in 11 Euro area countries and its consequent impact on economic activity. To obtain causal effects, I instrument business confidence with domestic household confidence as well as average household confidence in neighboring countries. I find evidence suggesting that the confidence and expectations channel was an important component to the economic transmission of Covid-19. A one standard deviation drop in business confidence leads to between 5-6 and 9 percent fall in economic activity in the industrial and wholesale and retail trade sectors respectively. These results highlight the importance of managing confidence and expectations in crises episodes.

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