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The quest for the best consumer confidence indicator

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  • Jonsson, Andreas
  • Lindén, Staffan

Abstract

Out of 11 questions included in the EU harmonised consumer questionnaire, it is possible to construct 2 047 different consumer confidence indicators. We search through all these indicators in order to find the single indicator that has the highest correlation with private consumption growth. Moreover, we contrast this indicator to the current Consumer Confidence Indicator used by the European Commission, and some alternative indicators; also in terms of their predictive power of private consumption. The focus of the analysis is thereby on how to best exploit the information content of the current set of questions included in the harmonised consumer questionnaire, while other methodological aspects of the construction of the indicator is left aside. In this context, we test the hypothesis that an indicator based on questions related to the household, rather than the general economy, would prove informative. It seems reasonable to assume that respondents to the surveys have better knowledge of their own economic situation than they have of the general economic situation in their country. We find that this "micro" indicator, as well as an optimal indicator that takes into account the specifics of all EU member states, outperform the current Consumer Confidence Indicator. Both these indicators also perform better than an indicator based on the popular factor methodology.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 25515.

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Date of creation: Mar 2009
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Handle: RePEc:pra:mprapa:25515

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Keywords: Consumer confidence; private consumption; predictive power;

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References

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  1. repec:fth:harver:1435 is not listed on IDEAS
  2. Saul H. Hymans, 1970. "Consumer Durable Spending: Explanation and Prediction," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 1(2), pages 173-206.
  3. Christian Gayer, 2007. "A fresh look at business cycle synchronisation in the euro area," European Economy - Economic Papers, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission 287, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  4. John Y. Campbell & N. Gregory Mankiw, 1989. "Consumption, Income, and Interest Rates: Reinterpreting the Time Series Evidence," NBER Working Papers 2924, National Bureau of Economic Research, Inc.
  5. E. Philip Howrey, 2001. "The Predictive Power of the Index of Consumer Sentiment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 32(1), pages 175-216.
  6. 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, Federal Reserve Bank of New York, issue Jun, pages 59-78.
  7. G. Goldrian & J.D. Lindbauer & G. Nerb & B. Ulrich, 2001. "Evaluation and development of confidence indicators based on harmonised business and consumer surveys (Study contracted to IFO, Munich)," European Economy - Economic Papers, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission 151, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  8. 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, American Economic Association, vol. 84(5), pages 1397-1408, December.
  9. Sydney C. Ludvigson, 2004. "Consumer Confidence and Consumer Spending," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 18(2), pages 29-50, Spring.
  10. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 86(6), pages 971-87, December.
  11. Jeff Dominitz & Charles F. Manski, 2004. "How Should We Measure Consumer Confidence?," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 18(2), pages 51-66, Spring.
  12. Christian Gayer & Julien Genet, 2006. "Using factor models to construct composite indicators from BCS data - a comparison with European Commission confidence indicators," European Economy - Economic Papers, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission 240, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
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Cited by:
  1. Roland Döhrn & Tobias Kitlinski & Martin Micheli & Torsten Schmidt & Simeon Vosen & György Barabas & Heinz Gebhardt & Lina Zimmermann, 2010. "Die wirtschaftliche Entwicklung im Inland zur Jahresmitte 2010 - Aufschwung verliert an Fahrt," RWI Konjunkturbericht, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, pages 46, 09.

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