The Effect of the Demand Side’s Confidence on the Supply Side’s Confidence: The Mediating Role of Financial Stress
Investment Management and Financial Innovations, 10(4), 43-47. December, 2013.
12 Pages Posted: 29 Aug 2012 Last revised: 25 Jan 2014
Date Written: August 28, 2012
This paper provides empirical evidence of how financial stress mediates the effect of the demand side’s confidence on the supply side’s confidence in the United States. Using monthly data from 1994:M2 to 2012:M5, the time-series regression analyses show that changes in the demand side’s confidence positively and significantly predicts the supply’s side confidence in the United States. The increased changes in the demand’s side confidence forecasts lower financial stress. When changes in financial stress and demand side’s confidence included in the regression to predict the changes in supply side’s confidence, the demand side’s confidence coefficient becomes statistically insignificant but the changes in financial stress coefficient is negative and statistically significant. The findings of this study imply that in a demand-driven economy, health of the financial sector plays a very important role in economic growth and prosperity because stressful financial sector puts downward pressures on businesses resulting in a higher unemployment rate in the economy due to workforce downsizing and freeze of new hire.
Keywords: business confidence, consumer confidence, financial stress
JEL Classification: E32, E44
Suggested Citation: Suggested Citation