Euro Area Business Confidence and COVID-19
24 Pages Posted: 16 Mar 2021 Last revised: 17 Mar 2021
Date Written: March 15, 2021
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.
JEL Classification: E23, E66, E71, I12
Suggested Citation: Suggested Citation