The Explanatory Power and the Forecast Performance of Consumer Confidence Indices for Private Consumption Growth in Turkey

In this study, we assess empirically the relevance of consumer confidence indices (CCI) to future private consumption dynamics for Turkey in a sample period of 2002Q1 to 2014Q4. To this end, we first estimate models for total private consumption, durable and nondurable consumption growth with and without CCI and evaluate in-sample forecast powers. Next, we evaluate one-step-ahead out-of-sample forecast performances of these models from recursive OLS estimates. Finally, we test whether permanent income and precautionary savings hypotheses are capable of explaining our results on the link between consumer sentiment and future consumption expenditures. In our analyses we employ 4 different CCI series. These are overall index of CNBC-e Survey, overall index of TURKSTAT-CBRT Survey, Consumer Expectations Index (CEI) and Propensity to Consume Index (PCI) from CNBC-e Survey. Our results show that CCI have explanatory power on the future growth of both total consumption and its subcomponents. However, when other relevant variables such as real labour income, real stock price index and real interest rate are augmented to the models, CNBC-e and CEI for durable consumption, CEI and PCI for nondurable consumption are able to preserve their explanatory power on future consumption growth. On the other hand, CCI measures improve out-of-sample forecast performance for nondurable consumption growth. Finally, we find no evidence for either precautionary savings motive or permanent income hypothesis on the link between consumer sentiment and future private consumption changes.