Effects of fiscal consolidation on business confidence in the Euro Area


  • Nektarios Michail Central Bank of Cyprus, Cyprus University of Technology
  • Christos Savva Department of Commerce, Finance and Shipping, Cyprus University of Technology
  • Demetris Koursaros Department of Commerce, Finance and Shipping, Cyprus University of Technology




We employ a factor-augmented VAR (FAVAR) covering both domestic and international developments to examine the confidence effects of a fiscal shock, using a sample of six euro area countries. The results indicate that following a shock in total government expenditure, responses are country-specific, while a weak geographical pattern, i.e. a distinction between core and periphery countries can be observed. Overall, the confidence response is short-lived and returns to zero after a few quarters. Heterogeneity in country responses also indicates that the Bachmann and Sims (2012) conclusion suggesting the endogenous response of confidence explaining almost all of the fiscal-driven output expansion in recessions, may hold only in country-specific cases.


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How to Cite

Michail, N., Savva, C., & Koursaros, D. (2018). Effects of fiscal consolidation on business confidence in the Euro Area. Economics and Business Letters, 7(2), 76–83. https://doi.org/10.17811/ebl.7.2.2018.76-83