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

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  • Daron Acemoglu
  • Andrew Scott

Abstract

Consumer confidence is found to have predictive content for a wide range of macroeconomic variables including consumption growth, contrary to standard REPIH. We find that on UK data the REPIH is rejected due to the predictive content of consumer confidence, and not labour income. We explain this finding in terms of precautionary behaviour. Extending the Hansen and Singleton Consumption CAPM model to allow a conditional variance we find a high level of confidence is associated with both greater optimism about the level of consumption and greater uncertainty about the forecaster variance. Once allowance is made for time aggregation the over identifying restrictions implied by this model are accepted. We estimate a small but statistically significant intertemporal elasticity of substitution.

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Bibliographic Info

Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0119.

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Date of creation: Feb 1993
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Handle: RePEc:cep:cepdps:dp0119

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Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

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