Business confidence as a strong tracker of future growth: is it driven by economic policy uncertainty and oil price shocks in the OECD countries?

Abstract

Business confidence matters for future growth as it relies on opinion surveys of developments in production activities, orders and stocks of finished products. Is it then affected by economic policy uncertainty and oil price asymmetries in the OECD countries? With limited evidence in the literature, we adopt the Augmented Mean Group (AMG) estimator following the evidence of cross-sectional dependence, non-stationarity and cointegration in the panel series. The full sample results show that business confidence is negatively affected by economic policy uncertainty and oil price. Moreover, the role of asymmetries cannot be neglected as both positive and negative oil price changes show different impacts on business confidence. The sub-sample results further reveal that the impacts of economic policy uncertainty and oil price on business confidence are higher in the Eurozone countries than in their non-Eurozone counterparts. We believe this is due to the central economic coordination and higher net-oil dependence and import status of the Eurozone countries.