Response of Business and Consumer Confidence to Monetary Policy Shock

Abstract:     
This paper empirically documents how business and consumer confidence responds to monetary policy shock. Based on the vector autoregression (VAR) analysis of the monthly changes in business and consumer confidence and the monthly Federal fund interest rates, the results show that both the changes in consumer confidence and business confidence negatively respond to monetary policy shock. The Granger causality tests show that the changes in business confidence can be predicted by monetary policy; however, monetary policy has no predictive power for the changes in consumer confidence. The findings of this study provide useful information for consumers, investors, businesses and policy makers in making sound consumption, investment and policy decisions.

Number of Pages in PDF File: 9

Keywords: business confidence, consumer confidence, monetary policy

JEL Classification: E52, E58

working papers series