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When should we care about consumer sentiment? Evidence from linear and Markov-switching models

Author

Listed:
  • Detelina Ivanova

    (University at Albany)

  • Kajal Lahiri

    (University at Albany)

Abstract

Using monthly data over 1978:01-1996:12 we examine the usefulness of the Index of Consumer Sentiment (ICS) in predicting aggregate consumption expenditure and its components. Bivariate causality tests in a linear model show the indicator value of ICS in predicting durables consumption. We propose Markov-switching models that differentiate between regimes of high and low consumption volatility where the former regime is characterized by a strong and markedly different relationship between consumption and ICS. We conclude that the benefits from including consumer sentiment in models of consumption are largest in periods when conflicting economic and sociopolitical news costs high overall uncertainty and wide swings in near term expectations of personal income. These high volatility periods are not always related to recessions. Interestingly, ICS loses its predictive power in the presence of forward-looking financial variables such as interest rate spreads and stock returns in linear as well as Markov-switching models.

Suggested Citation

  • Detelina Ivanova & Kajal Lahiri, 2001. "When should we care about consumer sentiment? Evidence from linear and Markov-switching models," Indian Economic Review, Department of Economics, Delhi School of Economics, vol. 36(1), pages 153-169, January.
    • Handle: RePEc:dse:indecr:v:36:y:2001:i:1:p:153-169
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    Citations

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    Cited by:

    1. Kajal Lahiri & George Monokroussos & Yongchen Zhao, 2016. "Forecasting Consumption: the Role of Consumer Confidence in Real Time with many Predictors," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 31(7), pages 1254-1275, November.
    2. Lucia F. Dunn & Ida A. Mirzaie, 2006. "Turns in Consumer Confidence: An Information Advantage Linked to Manufacturing," Economic Inquiry, Western Economic Association International, vol. 44(2), pages 343-351, April.
    3. Baghestani, Hamid, 2021. "Predicting growth in US durables spending using consumer durables-buying attitudes," Journal of Business Research, Elsevier, vol. 131(C), pages 327-336.
    4. Roberto Golinelli & Giuseppe Parigi, 2003. "What is this thing called confidence? A comparative analysis of consumer confidence indices in eight major countries," Temi di discussione (Economic working papers) 484, Bank of Italy, Economic Research and International Relations Area.
    5. David L. Haugh, 2005. "The Influence Of Consumer Confidence And Stock Prices On The United States Business Cycle," CAMA Working Papers 2005-03, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.

    More about this item

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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