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Forecasting Consumption: The Role of Consumer Confidence in Real Time with many Predictors

Author

Listed:
  • Kajal Lahiri

    (Department of Economics, University at Albany, State University of New York)

  • George Monokroussos

    (European Comission, Joint Research Centre (JRC))

  • Yongchen Zhao

    (Department of Economics, Towson University)

Abstract

We study the role of consumer confidence in forecasting real personal consumption expenditure, and contribute to the extant literature in three substantive ways: First, we reexamine existing empirical models of consumption and consumer confidence not only at the quarterly frequency, but using monthly data as well. Second, we employ real-time data in addition to commonly used revised vintages. Third, we investigate the role of consumer confidence in a rich information context. We produce forecasts of consumption expenditures with and without consumer confidence measures using a dynamic factor model and a large, real-time, jagged-edge data set. In a robust way, we establish the important role of confidence surveys in improving the accuracy of consumption forecasts, manifesting primarily through the services component. During the recession of 2007-09, sentiment is found to have a more pervasive effect on all components of aggregate consumption - durables, non-durables and services.

Suggested Citation

  • Kajal Lahiri & George Monokroussos & Yongchen Zhao, 2015. "Forecasting Consumption: The Role of Consumer Confidence in Real Time with many Predictors," Working Papers 2015-02, Towson University, Department of Economics, revised Jul 2015.
  • Handle: RePEc:tow:wpaper:2015-02
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    References listed on IDEAS

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    More about this item

    Keywords

    Forecasting; Consumption; Consumer Sentiment; Factor Models; Kalman Filter; Real-Time Data; Fluctuation test.;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications

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