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Consumer Confidence and Rational Expectations: Are Agents' Beliefs Consistent with the Theory?

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Author Info
Acemoglu, Daron
Scott, Andrew

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Abstract

Using U.K. data, the rational expectations permanent income hypothesis is rejected due to the predictive content of consumer confidence and not labor income or any other macroeconomic variable. The authors provide evidence suggesting that this cannot be explained by liquidity constraints and account for this finding in terms of precautionary saving. Extending the consumption capital asset pricing model to allow a time varying conditional variance, they find a high level of confidence is associated with greater optimism about the level of consumption but also a higher forecast variance. Allowing for time aggregation, the overidentifying restrictions implied by this model are accepted. The authors estimate a small but statistically significant intertemporal elasticity of substitution. Copyright 1994 by Royal Economic Society.

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Publisher Info
Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 104 (1994)
Issue (Month): 422 (January)
Pages: 1-19
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Handle: RePEc:ecj:econjl:v:104:y:1994:i:422:p:1-19

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  1. Saito, Makoto & Shiratsuka, Shigenori, 2003. "Precautionary Motives versus Waiting Options: Evidence from Aggregate Household Saving in Japan," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 21(3), pages 1-20, October. [Downloadable!]
  2. Dohmen, Thomas J & Falk, Armin & Huffman, David & Sunde, Uwe, 2006. "Seemingly Irrelevant Events Affect Perceptions and Expectations - The FIFA World Cup 2006 as a Natural Experiment," CEPR Discussion Papers 5851, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  3. Roberto Golinelli & Giuseppe Parigi, 2003. "What is this thing called confidence? A comparative analysis of consumer confidence indices in eight major countries," Temi di discussione (Economic working papers) 484, Bank of Italy, Economic Research Department. [Downloadable!]
  4. Karl Taylor & Robert McNabb, 2007. "Business Cycles and the Role of Confidence: Evidence for Europe," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 69(2), pages 185-208, 04. [Downloadable!] (restricted)
    Other versions:
  5. Claudio Soto, 2004. "Unemployment and Consumption in Chile," Working Papers Central Bank of Chile 258, Central Bank of Chile. [Downloadable!]
  6. Côté, Denise & Johnson, Marianne, 1998. "Consumer Attitudes, Uncertainty, and Consumer Spending," Working Papers 98-16, Bank of Canada. [Downloadable!]
  7. Luis Opazo, 2006. "The Backus-Smith Puzzle: The Role of Expectations," Working Papers Central Bank of Chile 395, Central Bank of Chile. [Downloadable!]
  8. Henley, A, 1996. "Changes in the Distribution of Housing Wealth in Great Britain 1985- 1991," Working Papers 96-08, University of Wales, Aberystwyth, Department of Economics. [Downloadable!]
    Other versions:
  9. Sarah Brown & Karl Taylor & Robert McNabb, 2006. "Financial Expectations, Consumption and Saving: A Microeconomic Analysis," Working Papers 2006006, The University of Sheffield, Department of Economics, revised May 2006. [Downloadable!]
    Other versions:
  10. Thomas Dohmen & Armin Falk & David Huffman & Uwe Sunde, 2006. "Seemingly Irrelevant Events Affect Economic Perceptions and Expectations: The FIFA World Cup 2006 as a Natural Experiment," IZA Discussion Papers 2275, Institute for the Study of Labor (IZA). [Downloadable!]
  11. Brigitte Desroches & Marc-André Gosselin, 2002. "The Usefulness of Consumer Confidence Indexes in the United States," Working Papers 02-22, Bank of Canada. [Downloadable!]
  12. Martin Sommer & Christopher Carroll, 2004. "Epidemiological expectations and consumption dynamics," Money Macro and Finance (MMF) Research Group Conference 2003 92, Money Macro and Finance Research Group. [Downloadable!]
  13. K. H. McIntyre, 2007. "Reconciling Consumer Confidence and Permanent Income Consumption," Eastern Economic Journal, Eastern Economic Association, vol. 33(2), pages 257-275, Spring. [Downloadable!]
  14. Lucia Dunn & Ida Mirzaie, 2004. "Turns in Consumer Confidence: An Information Advantage Linked To Manufacturing," Working Papers 04-03, Ohio State University, Department of Economics. [Downloadable!]
    Other versions:
  15. Berg Lennart & Bergström Reinhold, 1996. "Consumer Confidence and Consumption in Sweden," Working Paper Series 1996:7, Uppsala University, Department of Economics. [Downloadable!]
  16. Atsuo Utaka, 2003. "Confidence and the real economy - the Japanese case," Applied Economics, Taylor and Francis Journals, vol. 35(3), pages 337-342, January. [Downloadable!] (restricted)
  17. Allison Holland & Andrew Scott, . "The determinants of UK business cycles," Bank of England working papers 58, Bank of England. [Downloadable!]
    Other versions:
  18. Johansson, Martin W, 2002. "Reexamining loss aversion in aggregate consumption - Swedish and international evidence," Working Papers 2002:2, Lund University, Department of Economics. [Downloadable!]
  19. Khoon Lek Goh, 2003. "Does Consumer Confidence Forecast Consumption Expenditure in New Zealand?," Treasury Working Paper Series 03/22, New Zealand Treasury. [Downloadable!]
  20. David Begg & Stephany Griffith-Jones, 1998. "Swinging since the 60's: Fluctuations in UK Saving and Lessons for Latin America," RES Working Papers 3032, Inter-American Development Bank, Research Department. [Downloadable!]
  21. Marco Malgarini & Patrizia Margani, 2005. "Psychology, consumer sentiment and household expenditures: a disaggregated analysis," ISAE Working Papers 58, ISAE - Institute for Studies and Economic Analyses - (Rome, ITALY). [Downloadable!]
  22. repec:bep:macadv:v:7:y:2007:i:1:p:1444-1444 is not listed on IDEAS
  23. Paolo carnazza & Giuseppe Parigi, 2001. "The Evolution of Confidence for European Consumers and Businesses in France, Germany and Italy," Temi di discussione (Economic working papers) 406, Bank of Italy, Economic Research Department. [Downloadable!]
  24. Khoon Lek Goh & Richard Downing, 2002. "Modelling New Zealand Consumption Expenditure over the 1990s," Treasury Working Paper Series 02/19, New Zealand Treasury. [Downloadable!]
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