Reconciling Consumer Confidence and Permanent Income Consumption

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Reconciling Consumer Confidence and Permanent Income Consumption

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K. H. McIntyre () (McDaniel College)

Abstract

The forecasting power of consumer confidence indexes for consumption spending runs counter to the predictions of the permanent income hypothesis (PIH). This paper resolves this discrepancy by developing a “confidence augmented” permanent income hypothesis (CAPIH). While it does not radically alter the estimated extent of permanent income consumption, the CAPIH model predicts a significantly smaller intertemporal elasticity of substitution than a standard PIH model. In addition, the results are largely invariant to the measure of consumer confidence used and the choice of instrumental variables.

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Article provided by Eastern Economic Association in its journal Eastern Economic Journal.

Volume (Year): 33 (2007)
Issue (Month): 2 (Spring)
Pages: 257-275
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Handle: RePEc:eej:eeconj:v:33:y:2007:i:2:p:257-275

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

Baxter, Marianne, 1996. "Are Consumer Durables Important for Business Cycles?," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 147-55, February. [Downloadable!] (restricted)
Acemoglu, Daron & Scott, Andrew, 1994. "Consumer Confidence and Rational Expectations: Are Agents' Beliefs Consistent with the Theory?," Economic Journal, Royal Economic Society, vol. 104(422), pages 1-19, January. [Downloadable!] (restricted)
Other versions:
- Daron Acemoglu & Andrew Scott, 1993. "Consumer Confidence and Rational Expectations: Are Agents Beliefs Consistent with the Theory?," CEP Discussion Papers dp0119, Centre for Economic Performance, LSE.

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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

Douglas Lamdin, 2008. "Does Consumer Sentiment Foretell Revolving Credit Use?," Journal of Family and Economic Issues, Springer, vol. 29(2), pages 279-288, June. [Downloadable!] (restricted)

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This page was last updated on 2009-12-13.

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