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Int. J. Financial Stud. 2017, 5(4), 26; doi:10.3390/ijfs5040026

Size Effects of Fiscal Policy and Business Confidence in the Euro Area

1
Economic Analysis and Research Department, Central Bank of Cyprus and Department of Commerce, Finance and Shipping, Cyprus University of Technology, 30 Archbishop Kyprianou Str., 3036 Lemesos, Cyprus
2
Department of Commerce, Finance and Shipping, Cyprus University of Technology, 30 Archbishop Kyprianou Str., 3036 Lemesos, Cyprus
*
Author to whom correspondence should be addressed.
Academic Editor: Nicholas Apergis
Received: 19 September 2017 / Revised: 30 October 2017 / Accepted: 30 October 2017 / Published: 8 November 2017
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Abstract

In the aftermath of the European sovereign debt crisis (2009–2014), the management of expectations has risen in importance. However, policy responses have emphasized the management of fiscal spending without examining the impact changes in the business confidence have on the economy. This paper uses a Factor-Augmented Vector Autoregressive specification, which allows for a larger information set covering both domestic and international developments, to measure the responses of five Euro Area economies to a one percent shock in government consumption and business confidence. The evidence suggests that even though the response to a government consumption shock is strong, a shock in expectations has an even greater effect. This points out to the fact that perceptions about the future and trust in the policymaker are much more important than previously considered. Thus, especially in (but not limited to) times of turbulence, or during efforts of stabilization and/or structural reforms, more emphasis should be placed on the overall credibility of the decisions, which could help to mitigate any potential adverse effects from the policies. View Full-Text
Keywords: fiscal shocks; FAVAR; expectations; policy fiscal shocks; FAVAR; expectations; policy
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This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. (CC BY 4.0).

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Michail, N.A.; Savva, C.S.; Koursaros, D. Size Effects of Fiscal Policy and Business Confidence in the Euro Area. Int. J. Financial Stud. 2017, 5, 26.

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Int. J. Financial Stud. EISSN 2227-7072 Published by MDPI AG, Basel, Switzerland RSS E-Mail Table of Contents Alert
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