Does Consumer Confidence Forecast Household Spending?
AbstractThe traditional consumption function based on the life cycle permanent income hypothesis (LC-PIH) considers that consumer spending is based on households’ expectations of their future income. However, in short-term forecasting, the traditional economic determinants of consumption do not perform accurately. In addition to these macroeconomic variables, a measure of uncertainty is needed to better assess the short-term dynamics of the consumption function. Such a measure of uncertainty may be given by households’ expectations about their personal financial situation and general economic situation. A measure of these expectations is provided by consumer confidence (measured by the Consumer Confidence Index - CCI). In addition, consumer confidence seems to contain both a forecasting and independent explicative ability to predict consumption. Economic variables do not fully explain confidence, suggesting that its independent explicative power stems from its idiosyncratic features. We discuss in detail these features thanks to a review of the theoretical and empirical literature by discussing the consistency of consumer confidence with the standard consumption theory, analysing the determinants of the CCI and studying the predictive and causal power of the CCI.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 902.
Date of creation: 22 Nov 2006
Date of revision:
Consumer confidence; consumption function; forecasting;
Find related papers by JEL classification:
- D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
- C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
- D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
- E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
- E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
- C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-12-04 (All new papers)
- NEP-FOR-2006-12-04 (Forecasting)
- NEP-MAC-2006-12-04 (Macroeconomics)
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