Confidence is a feedback loop.
Yumei Guo 20, Professor at Central University of Finance and Economics; Shan He, School of Finance, Central University of Finance and Economics, September 2020, “Does confidence matter for economic growth? An analysis from the perspective of policy effectiveness,” International Review of Economics & Finance 69, 10.1016/j.iref.2020.04.012, Stras
The results shown in Table 3, Table 4 together prove that both consumer and business confidence are more essential during an economic slack, which is highly relevant for policy and has strong implications for policymakers. Confidence is more important during an economic slack because agents have pessimistic expectations and engage in conservative behaviors in consumption and investment, which makes the economy more sensitive to confidence changes. Ilut and Saijo (2020) pointed out that a lack of confidence can further discourage economic activities, which will trigger a feedback loop and lead the economy into a deeper recession. Zhang (2017) also found that by shutting down the confidence channel, the effect of uncertainty shocks is greatly dampened and less persistent. We echo their idea with support from empirical evidence.