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AbstractThis study revisits business cycle duration dependence in G7 countries by controlling for foreign recessions, defined as the number of other G7 countries in a recession. Estimates from regime switching logit models show that the monthly likelihood of ending an expansion roughly doubles for every extra G7 country in recession, but the end of foreign recessions do not affect the ending of recessions. They also show that recessions are duration dependent in all G7 countries, but expansions only in the United States and Germany. The economic importance of foreign recessions and duration in driving business cycle phase changes vary across countries.

ObjectivesThe literature typically undervalues the economy‐wide importance of confidence, despite a renewed interest since the recent financial crisis in considering also psychological factors such as confidence. This study empirically assesses whether confidence matters for current real GDP growth in the euro area and the United States in addition to a widely applied and reliable predictor, the Purchasing Managers' Index.MethodsWe add confidence indicators to a regression of real GDP growth on the composite PMI output index and check for a different impact of confidence during recessions as opposed to expansions by applying smooth transition regressions.ResultsConfidence matters for economic growth, both in good and bad times. This result is robust across sample periods, models, and proxies for confidence.ConclusionsConfidence is essential for assessing the current stage of the business cycle. Analysts should therefore closely monitor sentiment swings, whereas private and public decisionmakers can boost growth by improving confidence in the economy.