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Why does consumer sentiment predict household spending?

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Author Info
Yash P. Mehra
Elliot W. Martin
Abstract

Consumer sentiment may predict future household spending, either because sentiment is an independent causal force or because it foreshadows current economic conditions. The empirical evidence we present favors the second interpretation. The evidence in previous research that favors the first interpretation is not robust because the analysis failed to control for the possible influences of expected changes in income and interest rates on consumer spending. Consumer sentiment foreshadows current expectations about the economy as well as about interest rates, suggesting that it is useful as a barometer of the near-term outlook for spending.

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Article provided by Federal Reserve Bank of Richmond in its journal Economic Quarterly.

Volume (Year): (2003)
Issue (Month): Fall ()
Pages: 51-67
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Handle: RePEc:fip:fedreq:y:2003:i:fall:p:51-67:n:v.89no.4

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Keywords: Consumer behavior Consumption (Economics) Economic conditions

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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.:
  1. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-87, December. [Downloadable!] (restricted)
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  2. Jason Bram & Sydney Ludvigson, 1998. "Does consumer confidence forecast household expenditure? a sentiment index horse race," Economic Policy Review, Federal Reserve Bank of New York, issue Jun, pages 59-78. [Downloadable!]
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  3. Eric M. Leeper, 1992. "Consumer attitudes: king for a day," Economic Review, Federal Reserve Bank of Atlanta, issue Jul, pages 1-15.
  4. Pischke, Jorn-Steffen, 1995. "Individual Income, Incomplete Information, and Aggregate Consumption," Econometrica, Econometric Society, vol. 63(4), pages 805-40, July. [Downloadable!] (restricted)
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  5. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March. [Downloadable!] (restricted)
  6. John Y. Campbell & N. Gregory Mankiw, 1990. "Consumption, Income, and Interest Rates: Reinterpreting the Time Series Evidence," NBER Working Papers 2924, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Carroll, Christopher D & Fuhrer, Jeffrey C & Wilcox, David W, 1994. "Does Consumer Sentiment Forecast Household Spending? If So, Why?," American Economic Review, American Economic Association, vol. 84(5), pages 1397-1408, December. [Downloadable!] (restricted)
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  8. Marianne Baxter & Urban J. Jermann, 1999. "Household Production and the Excess Sensitivity of Consumption to Current Income," American Economic Review, American Economic Association, vol. 89(4), pages 902-920, September. [Downloadable!] (restricted)
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  9. Yash P. Mehra, 2001. "The wealth effect in empirical life-cycle aggregate consumption equations," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 45-67. [Downloadable!]
  10. Goodfriend, Marvin, 1992. "Information-Aggregation Bias," American Economic Review, American Economic Association, vol. 82(3), pages 508-19, June. [Downloadable!] (restricted)
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  11. Falk, Barry L. & Lee, Bong-Soo, 2003. "Time Series Implications of Friedman's Permanent Income Hypothesis," Staff General Research Papers 11094, Iowa State University, Department of Economics.
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  12. Deaton, A. & Grosh, M., 1998. "Consumption," Papers 191, Princeton, Woodrow Wilson School - Development Studies.
  13. Karen E. Dynan, 1993. "Habit formation in consumer preferences: evidence from panel data," Working Paper Series / Economic Activity Section 143, Board of Governors of the Federal Reserve System (U.S.).
  14. Orazio P. Attanasio, 1998. "Consumption Demand," NBER Working Papers 6466, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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Cited by:
(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.)

  1. David L. Haugh, 2005. "The Influence Of Consumer Confidence And Stock Prices On The United States Business Cycle, 1953-2003," CAMA Working Papers 2005-03, Australian National University, Centre for Applied Macroeconomic Analysis. [Downloadable!]
  2. 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!]
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