Does Consumer Confidence Forecast Household Spending? The Euro Area Case

Dion, David Pascal (2006): Does Consumer Confidence Forecast Household Spending? The Euro Area Case. Unpublished.

Abstract

The following analysis, based on error correction models, suggests that consumer confidence, together with traditional macroeconomic variables, contains a forecasting and explicative power on consumption. By including consumer confidence in a consumption function, consumer confidence releases a significant coefficient. Such a confidence-augmented consumption model provides good forecasting results.

• Item Type: MPRA Paper
• Language: English
• Keywords: Consumer confidence; consumption function; forecasting; consumer attitudes and behaviour; households
• Subjects: D - Microeconomics > D1 - Household Behavior and Family Economics > D12 - Consumer Economics: Empirical Analysis; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C53 - Forecasting and Other Model Applications; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Employment, and Investment > E27 - Forecasting and Simulation; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Employment, and Investment > E21 - Macroeconomics: Consumption; Saving; Aggregate Physical and Financial Consumer Wealth; D - Microeconomics > D1 - Household Behavior and Family Economics > D11 - Consumer Economics: Theory; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C52 - Model Evaluation and Selection

References

Berg, L. and Bergstrom, R. (1996), “Consumer confidence and consumption in Sweden,” Uppsala universitat / Working paper N. 7, p. 2-30.

Bram, J. and Ludvigson, S. (1998), “Does consumer confidence forecast household expenditure? A sentiment index horse race,” Economic policy review (Federal Reserve Bank of New York), Vol. 4, N. 2, p.59-78.

Campbell, J. and Mankiw, N. G. (1991), “The response of consumption to income. A cross-country investigation,” European Economic Review, vol. 35.

Carroll, C. D., Fuhrer, J. C. and Wilcox, D. W. (1994), “Does consumer sentiment forecast household spending? If so, why?,” American economic review, Volume 85, N. 5, p. 1397-1408.

Dion, D-P. (2006), “Does consumer confidence forecast household spending?”, mimeo.

--- and Kolodjiezak, A. (2001), “The BUSY modelling project and the construction of the BUSY III macro-econometric model: Towards a powerful short-term forecasting tool on the basis of survey data”, European Commission – Economic Paper.

Flavin, M. (1981), “ The adjustment of consumption to changing expectations about future income,” Journal of political economy, N. 89, p. 974-1009.

Howrey, E. P. (2001), “The predictive power of the index of consumer sentiment,” Brookings Papers on Economic Activity, Vol. 1, p. 175-216.

Katona, G. (1975), Psychological Economics, New York, Elsevier. --- (1960), The powerful consumer: Psychological studies of American economy, McGraw Hill, New York. --- (1951), Psychological analysis of economic behaviour, McGraw Hill, New York.

Keynes, J. M. (1936), The general theory of employment, interest, and money, New York, N. Y. Harcourt Brace Jovanovich.

Kumar, V., Leone, R. P. and Gaskins, J. N. (1995), “Aggregate and disaggregate sector forecasting using consumer confidence measures,” International journal of forecasting, Vol. 11, N. 3, p. 361-77.

Lovell, M. C. (1975), “Why was the consumer feeling so bad?,” Brookings Papers on Economic Activity, N. 2, p. 473-79.

Muellbauer, J. and Lattimore, R. (1995), “The consumption function: A theoretical and empirical overview,” in Handbook of Applied Econometrics: Macroeconomics, edited by M. H. Pesaran and M. R. Wickens, p. 221-311. Oxford: Blackwell. Mueller, E. (1963), “Ten years of consumer attitude surveys: Their forecasting record,” Journal of the American statistical association, Vol. 58, p. 899-917.

Parigi, G. and Schlitzer, G. (1995), “Quarterly forecasts of the Italian business cycle by means of monthly economic indicator,” Journal of forecasting, N. 14, p. 117-41.

Souleles, N. (2001), “Consumer sentiment: Its rationality and usefulness in forecasting expenditure – Evidence from the Michigan Micro Data,” NBER Working Paper 8410.

Throop, A. W. (1992), “Consumer sentiment: its causes and effects,” Economic review (Federal Reserve Bank of San Francisco), N. 1, p. 35-59.