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Does business confidence matter for investment?

  • Hashmat KhanEmail author
  • Santosh Upadhayaya
Article
  • 5 Downloads

Abstract

Business confidence is a well-known leading indicator of future output. Whether it has information about future investment is, however, unclear. We determine how informative business confidence is for investment growth independently of other variables using US business confidence survey data for 1955Q1–2016Q4. Our main findings are: (i) business confidence has predictive ability for investment growth; (ii) remarkably, business confidence has superior forecasting power, relative to conventional predictors, for investment downturns over 1–3-quarter forecast horizons and for the sign of investment growth over a 2-quarter forecast horizon; and (iii) exogenous shifts in business confidence reflect short-lived non-fundamental factors, consistent with the ‘animal spirits’ view of investment. Our findings have implications for improving investment forecasts, developing new business cycle models, and studying the role of social and psychological factors determining investment growth.

Keywords

Business confidence Investment Forecasting Downturns Directional forecasts 

JEL Classification:

C32 E22 E32 E37 

Notes

Compliance with ethical standards

Conflict of interest

The authors declare that they have no conflict of interest.

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Copyright information

© Springer-Verlag GmbH Germany, part of Springer Nature 2019

Authors and Affiliations

  1. 1.Department of Economics, B843 LoebCarleton UniversityOttawaCanada
  2. 2.Department of Economics, D844 LoebCarleton UniversityOttawaCanada
  3. 3.Ottawa-Carleton GSEOttawaCanada

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