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Examining the Role of Consumer Confidence Within an IS Curve Framework

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Author Info
Umar Faruqui
Nicolas Moreau
Abstract

Consumer confidence indices are often viewed as leading indicators of economic activity. In this paper, we investigate the role of these indices in forecasting output growth for the United States and Canada within an IS-curve framework. Our results show that in the case of the U.S. inclusion of consumer confidence helps predict real GDP growth only when movements in confidence are very large, as during the 1990-1991 Gulf War episode. For Canada, on the other hand, we find that, regardless of the magnitude of the change in the confidence index, the inclusion of consumer confidence does not significantly enhance the forecasting properties of our equation.

Les indices de confiance des consommateurs sont souvent considérés comme des indicateurs avancés de l’activité économique. Dans cette présente étude, nous examinons la pertinence d’utiliser ces indices à l’intérieur d’une fonction de demande agrégée afin d’aider à prévoir la croissance de la production aux États-Unis et au Canada. Nos résultats montrent que l’inclusion de la confiance des consommateurs peut aider à prévoir la croissance de l’économie américaine, mais seulement lorsque les changements de l’indice sont très grands, comme ce fut le cas durant l’épisode de la guerre du Golfe de 1990-1991. Par contre, pour le Canada, nous trouvons que, peu importe la taille des changements de l’indice de confiance, l’inclusion de la confiance des consommateurs ne permet pas d’améliorer de façon significative les propriétés de prévision de notre équation.

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Paper provided by Department of Finance Canada in its series Working Papers-Department of Finance Canada with number 2004-07.

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Handle: RePEc:fca:wpfnca:2004-07

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