Does confidence matter for economic growth? An analysis from the perspective of policy effectiveness

Abstract The term “confidence” is often used in relation to economic issues, and has been increasingly discussed in the media and by policy makers since the 2008 global financial crisis. However, the question remains of whether confidence actually affects economic growth. Using panel data on 41 countries from 1991 to 2017, we study how consumer and business confidence affect economic growth. We find that confidence positively affects economic growth, and that this effect is amplified during recessions and in low-confidence situations. Further analysis shows that confidence has a greater effect during recessions by amplifying the effect of monetary and fiscal policies. The results of generalized method of moments analysis prove the robustness of the main findings. In general, our study reveals that confidence plays a significant role in the economy, thus supporting the notion that governments should give more consideration to confidence when trying to stimulate the economy.