Work detail

The Role of Business Confidence in the Monetary Policy Transmission Mechanism: Evidence from the Euro Area

Author: Mgr. Zhaozhi Liu
Year: 2021 - summer
Leaders: doc. Mgr. Tomáš Holub Ph.D.
Work type: Masters
Language: English
Pages: 75
Awards and prizes:
Abstract: Traditional macroeconomics believes that confidence is not the main cause of
economic fluctuations, but when faced with financial crises, monetary authorities still
emphasize the role of stabilizing confidence. Although people generally agree that
confidence is an important part of the transmission of macro-policies to microindividuals, there is neither empirical evidence support nor corresponding mechanism
research. This thesis attempts to answer the following questions: Does business
confidence affect the effectiveness of monetary policy? Does business confidence
have the same impact on monetary policy in different economic periods?
This thesis first constructed a structural vector auto-regression (SVAR) model to test
the role of business confidence in the transmission of monetary policy in the euro area.
The empirical results show that expansionary monetary policy can effectively boost
business confidence while stimulating output growth. In addition, this thesis extends
the model by introducing share prices and exchange rates to investigate the role of these
two important to the monetary transmission mechanism, concluding that business
confidence plays a strong role in interest rate transmission and a weaker role in the
transmission of asset prices and exchange rates. Subsequently, in order to verify the
influence of business confidence with different lead times and different time points on
monetary policy, this thesis established a time-varying parameter vector autoregression
(TVP-VAR) model. The role of confidence in the transmission of monetary policy is
mainly manifested as a short-term impact, which gradually weakens in the long-term.
Moreover, at different stages of economic development, the business confidence index
has different effects on the transmission of monetary policy. In times of economic crisis,
the role of confidence will be more sensitive.
January 2022




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