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Modeling consumer confidence and its role for expectation formation: A horse race

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  • Jang, Tae-Seok
  • Sacht, Stephen

Abstract

The notion of bounded rationality has received a considerable attention in the midst of debate over the usefulness of various macroeconomic models. In this paper we empirically seek to analyze the baseline New-Keynesian model with heterogeneous agents who may adopt various heuristics used to forecast future movements in consumption. Agents could exhibit an optimistic or pessimistic view or act as fundamentalists or chartists when forming expectations on future consumption based on discrete choice. Our empirical results via the Simulated Method of Moment Approach show that consumer confidence in the US is heavily grounded on consumers' emotional state (with respect to optimism and pessimism), while for the Euro Area it is most likely technical in nature (with respect to fundamentalists and chartists). These heuristics lead to an equivalent or even better fit to the data compared to the hybrid version of the baseline New-Keynesian model. We argue that this study could open up new possibilities for estimating bounded rationality models and policy analysis.

Suggested Citation

  • Jang, Tae-Seok & Sacht, Stephen, 2017. "Modeling consumer confidence and its role for expectation formation: A horse race," Economics Working Papers 2017-04, Christian-Albrechts-University of Kiel, Department of Economics.
    • Handle: RePEc:zbw:cauewp:201704
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    References listed on IDEAS

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    Cited by:

    1. Reiner Franke & Frank Westerhoff, 2017. "Taking Stock: A Rigorous Modelling Of Animal Spirits In Macroeconomics," Journal of Economic Surveys, Wiley Blackwell, vol. 31(5), pages 1152-1182, December.
    2. Kukacka, Jiri & Jang, Tae-Seok & Sacht, Stephen, 2018. "On the estimation of behavioral macroeconomic models via simulated maximum likelihood," Economics Working Papers 2018-11, Christian-Albrechts-University of Kiel, Department of Economics.
    3. Marina Matosec & Zdenka Obuljen Zoricic, 2019. "Identifying the Interdependence between Consumer Confidence and Macroeconomic Developments in Croatia," Interdisciplinary Description of Complex Systems - scientific journal, Croatian Interdisciplinary Society Provider Homepage: http://indecs.eu, vol. 17(2-B), pages 345-354.

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    More about this item

    Keywords

    Bounded Rationality; Consumer Confidence; New-Keynesian Model; Forecast Heuristics; Simulated Method of Moments;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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