Jonsson, Andreas and Lindén, Staffan (2009): The quest for the best consumer confidence indicator.
Download (696kB) | Preview
Out of 11 questions included in the EU harmonised consumer questionnaire, it is possible to construct 2 047 different consumer confidence indicators. We search through all these indicators in order to find the single indicator that has the highest correlation with private consumption growth. Moreover, we contrast this indicator to the current Consumer Confidence Indicator used by the European Commission, and some alternative indicators; also in terms of their predictive power of private consumption. The focus of the analysis is thereby on how to best exploit the information content of the current set of questions included in the harmonised consumer questionnaire, while other methodological aspects of the construction of the indicator is left aside.
In this context, we test the hypothesis that an indicator based on questions related to the household, rather than the general economy, would prove informative. It seems reasonable to assume that respondents to the surveys have better knowledge of their own economic situation than they have of the general economic situation in their country. We find that this "micro" indicator, as well as an optimal indicator that takes into account the specifics of all EU member states, outperform the current Consumer Confidence Indicator. Both these indicators also perform better than an indicator based on the popular factor methodology.
|Item Type:||MPRA Paper|
|Original Title:||The quest for the best consumer confidence indicator|
|Keywords:||Consumer confidence; private consumption; predictive power|
|Subjects:||E - Macroeconomics and Monetary Economics > E2 - Macroeconomics: Consumption, Saving, Production, Employment, and Investment > E27 - Forecasting and Simulation: Models and Applications
E - Macroeconomics and Monetary Economics > E2 - Macroeconomics: Consumption, Saving, Production, Employment, and Investment > E29 - Other
E - Macroeconomics and Monetary Economics > E2 - Macroeconomics: Consumption, Saving, Production, Employment, and Investment > E21 - Consumption; Saving; Wealth
|Depositing User:||Staffan Lindén|
|Date Deposited:||02. Oct 2010 21:36|
|Last Modified:||16. Feb 2013 01:02|
Blanchard, O. J. and S. Fischer (1989), "Lectures in macroeconomics", The MIT Press, MA.
Blanchard, O. J., (1993), "What caused the last recession? Consumption and the recession of 1990-91", American Economic Review, 83 (2), p. 270-274.
Bram, J and S. Ludvigson (1998), "Does consumer sentiment forecast household expenditure? A sentiment index horse race", FRBNY Economic Policy Review, June.
Campbell, J. and G. Mankiw (1989), "Consumption, income and interest rates: Reinterpreting the time series evidence", In: Blanchard, O., Fischer, S. (Eds.), NBER Macroeconomic Annual, MIT Press, MA, p. 185-216.
Carroll, C. D., J. C. Fuhrer and G. D. W Wilcox (1994), "Does consumer sentiment forecast household spending? If so, why?", American Economic Review, 85 (5), p. 1397-1408.
Dominitz, J. and C. F. Manski (2004), “How should we measure Consumer Confidence”, Journal of Economic Perspectives, 18/2, p. 51-66.
Easaw, J. Z. D. Garratt and S. M. Heravi (2005), “Does consumer sentiment accurately forecast UK household consumption? Are there any comparisons to be made with the US?”, Journal of Macroeconomics, 27, p. 517-532.
Eppright, D. R., N. M. Arguea, W. L. Huth (1998) “Aggregate consumer expectation indexes as indicators of future consumer expenditures”, Journal of Economic Psychology 19: p. 215-235.
European Commission (2007), The Joint Harmonised EU Programme of Business and Consumer Surveys. User Guide, DG ECFIN, Brussels.
Friedman, M. (1957) "A Theory of the Consumption Function", Princeton University Press, Princeton.
Gayer, C and J Genet (2006), "Using factor models to construct composite indicators from BCS Data - A comparison with European Commission confidence indicators", European Economy, Economic Papers No. 240, January 2006, European Commission, Brussels.
Gayer, C. (2007), "A fresh look at business cycle synchronisation in the euro area", European Economy. Economic Papers No. 287, October 2007, European Commission, Brussels.
Goldrian G; J D Lindlbauer and G Nerb (2001), "Evaluation and development of confidence indicators based on harmonised business and consumer surveys ", Economic Papers no 151 (European Commission, Directorate-General for Economic and Financial Affairs), May.
Hall, R. E. (1978) “Stochastic implications of the Life Cycle-Permanent Income Hypothesis: theory and evidence”, Journal of Political Economy, 86(6), p. 971-987.
Howrey E P (2001), "The Predictive Power of the Index of Consumer Sentiment", Brookings Papers on Economic Activity, vol. 2001, No. 1, p. 175-207.
Hymans S H (1970), "Consumer Durable Spending: Explanation and Prediction" Brookings Papers on Economic Activity, vol. 1970, No. 2, p. 173-206.
Katona G (1968), “Consumer behavior: Theory and findings on expectations and aspirations" Brookings Papers on Economic Activity, 58, p. 19-30.
Ludvigson S (2004), “Consumer confidence and consumer spending”, Journal of Economic Perspectives, 18/2, p. 29-50.
Madsen J B and M McAleer (2000), "Direct Tests of the Permanent Income Hypothesis under Uncertainty, Inflationary Expectations and Liquidity Constraints", Journal of Macroeconomics, Vol. 22, no. 2, p. 229-252
Taylor K and R McNabb (2007), "Business Cycles and the Role of Confidence: Evidence for Europe", Oxford Bulletin of Economics and Statistics, 69 (2), p. 185-207