Global Confidence, Uncertainty, and Business Cycles

76 Pages Posted: 16 Dec 2020 Last revised: 22 Feb 2021

Date Written: December 14, 2020


This paper investigates the role of global confidence cycles, measured as the common factor across a wide range of survey-based business or consumer confidence indicators on global macroeconomic fluctuations over 1970-2019. I estimate a factor-augmented vector autoregression model, where global confidence shocks are identified through recursive restriction. I report three main results. First, the global confidence cycle, in particular that of consumer confidence, has played a key role in global business cycle fluctuations, explaining over a third and over a half, respectively, of total variation in global industrial production and employment over 1985-2019. Second, the results suggest that while global business confidence shocks are in nature demand-driven, global consumer confidence seems to reflect macroeconomic shocks in both demand and supply sides, in line with “animal spirit” and “news” views on the relation between confidence and economic activities. Third, the empirical results suggest that the plunges in economic confidence caused by the COVID-19 pandemic have led to around 25 percent decline in global industrial production by the end of 2020. The results are robust to the ordering of variables or alternative identifying schemes that include external instrument identification.

Keywords: Global Confidence Cycle; Global Uncertainty; Business Cycle; Financial Cycle; COVID-19; FAVAR; Dynamic Factor Model

JEL Classification: E32, F20, F42

Suggested Citation

Ha, Jongrim, Global Confidence, Uncertainty, and Business Cycles (December 14, 2020). Available at SSRN: or

Jongrim Ha (Contact Author)

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

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