The effect of gas and oil prices on economic confidence: An empirical analysis for euro area

Abstract

Energy prices are determinants of economic confidence by directly affecting production, consumption, and transportation costs. Nevertheless, countries' energy policies and macroeconomic and geopolitical developments may moderate the impact of energy prices on economic confidence. This study analyzes the effects of oil and gas prices on business and confidence in the Euro Area over the period 1994-2023. We employ non-linear correlation and regression models to investigate the spillover relationship between the variables. For this purpose, the Markov Switching Regression (MSR) model is employed to analyze the spillover effect of oil and gas prices on both consumer and business confidence. The empirical results show that oil and gas prices harm consumer confidence in all regimes. Oil prices have a positive effect on business confidence in a volatility regime. However, oil prices negatively affect business confidence in low volatility, but this effect is insignificant. The effect of gas prices on the business confidence index is negative and statistically significant during periods of high volatility. Besides, gas prices positively affect business confidence for low volatility.