Abstract

This paper evaluates whether the Euro Area Economic Sentiment Indicator (ESI)โ€”a monthly composite of business and consumer surveysโ€”provides leading information for real activity and supports decision-making under uncertainty. We study how its predictive content varies across uncertainty regimes defined by the Economic Policy Uncertainty (EPU) index: low uncertainty when ๐ธ๐‘ƒ๐‘ˆ! โ‰ค ๐›พ and high uncertainty ๐ธ๐‘ƒ๐‘ˆ! > ๐›พ , with ๐›พ set at the 70th percentile of the historical distribution to capture stress episodes while preserving sample size. ESI aggregates cross-sector expectations (industry, services, consumers, retail, construction) and, as a forward-looking survey indicator, is a natural proxy for information flows that precede hard data releases. Using monthly Euro Area data for 1991โ€“2025, we estimate a Vector Autoregressive (VAR) model and a Threshold VAR (TVAR) with an EPU-based regime split. Impulse-response analysis shows that positive shocks to ESI lead to statistically significant increases in industrial production and consumer confidence; these effects are larger and more persistent in high-uncertainty regimes. FEVDs attribute a meaningful share of short-horizon fluctuations to sentiment innovations. We report twelve-month impulse responses with bootstrap confidence intervals and conduct threshold-sensitivity checks (65thโ€“75th percentiles). Results are robust to alternative lags, generalized identification, added macro-financial controls, and reasonable EPU thresholds. The evidence supports ESI as an informational asset that gains value when uncertainty is elevated, consistent with theories in which sentiment substitutes for delayed or noisy hard indicators [7], [25]. The findings have practical implications for real-time monitoring, policy assessment and communication practice in the Euro Area and invite extensions to sectoral or country-level settings.

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