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Consumer sentiment and consumer spending: decomposing the Granger causal relationship in the time domain

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  • Sarah Gelper
  • Aurelie Lemmens
  • Christophe Croux
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    Abstract

    It is often believed that the consumer sentiment index has predictive power for future consumption levels. While Granger causality tests have already been used to test for this, no attempt has been made yet to quantify the predictive power of the consumer sentiment index over different time horizons. In this article, we decompose the Granger causality at different time lags, by looking at a sequence of nested prediction models. Since the consumer sentiment index turns out to be cointegrated with real consumption, we resort to error correcting models. Four consumption series are studied, namely total real consumption, real consumption of durables, non-durables and services. Among other findings, we show that the consumer sentiment index Granger causes future consumption with an average time lag of 4-5 months. Furthermore, it is found that the consumer sentiment index has more incremental predictive power for consumption of services than for consumption of durables or non-durables, and that the index is not only useful as a predictor at the very short term, but keeps predictive power at larger time horizons.

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/00036840500427791
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    Bibliographic Info

    Article provided by Taylor and Francis Journals in its journal Applied Economics.

    Volume (Year): 39 (2007)
    Issue (Month): 1 ()
    Pages: 1-11

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    Handle: RePEc:taf:applec:v:39:y:2007:i:1:p:1-11

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    References

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    1. Kumar, V. & Leone, Robert P. & Gaskins, John N., 1995. "Aggregate and disaggregate sector forecasting using consumer confidence measures," International Journal of Forecasting, Elsevier, vol. 11(3), pages 361-377, September.
    2. Batchelor, Roy & Dua, Pami, 1998. "Improving macro-economic forecasts: The role of consumer confidence," International Journal of Forecasting, Elsevier, vol. 14(1), pages 71-81, March.
    3. Lemmens, A. & Croux, C. & Dekimpe, M.G., 2004. "On The Predictive Content Of Production Surveys: A Pan-European Study," Research Paper ERS-2004-017-MKT, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni.
    4. Charles Delorme & David Kamerschen & Lisa Ford Voeks, 2001. "Consumer confidence and rational expectations in the United States compared with the United Kingdom," Applied Economics, Taylor and Francis Journals, vol. 33(7), pages 863-869.
    5. Lemmens, Aurélie & Croux, Christophe & Dekimpe, Marnik, 2005. "On the predictive content of production surveys: A pan-European study," Open Access publications from Katholieke Universiteit Leuven urn:hdl:123456789/101089, Katholieke Universiteit Leuven.
    6. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501, September.
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    Cited by:
    1. Qiao, Zhuo & McAleer, Michael & Wong, Wing-Keung, 2009. "Linear and nonlinear causality between changes in consumption and consumer attitudes," Economics Letters, Elsevier, vol. 102(3), pages 161-164, March.
    2. Lux, Thomas, 2009. "Rational forecasts or social opinion dynamics? Identification of interaction effects in a business climate survey," Journal of Economic Behavior & Organization, Elsevier, vol. 72(2), pages 638-655, November.
    3. Douglas Lamdin, 2008. "Does Consumer Sentiment Foretell Revolving Credit Use?," Journal of Family and Economic Issues, Springer, vol. 29(2), pages 279-288, June.
    4. Dudek, Sławomir, 2008. "Consumer Survey Data and short-term forecasting of households consumption expenditures in Poland," MPRA Paper 19818, University Library of Munich, Germany.

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