Business Confidence Shocks and the Relevance of Exchange Rate Volatility and Economic Policy Uncertainty Channels

Abstract

This chapter determines the role of business confidence on economic growth by applying the counterfactual analysis. In addition, what would have happened to South African economic growth following positive the US and China economic growth shocks in the presence and absence of the business confidence channel. The chapter further examines the role of exchange rate volatility and economic policy uncertainty in the transmission of negative business confidence shocks to GDP growth, consumption expenditure growth and exports growth. Evidence shows growth in GDP, consumption and exports growth decline much more in the absence of exchange rate volatility following a negative business confidence shock than when volatility is shutoff in the model. In addition, evidence shows that South African GDP growth and consumption expenditure decline more due to negative business confidence shock in the presence of elevated economic policy uncertainty. The results suggest that business confidence plays an integral part in propagating or amplifying the positive growth spillovers from the US and China into South African GDP growth. At the same time, evidence shows that shutting off the effects of confidence to external growth shocks results in trajectories of economic growth that are dampened compared to when confidence is not purged.