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

Tae-Seok Jang and Stephen Sacht

No 2017-04, Economics Working Papers from Christian-Albrechts-University of Kiel, Department of Economics

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.

Keywords: Bounded Rationality; Consumer Confidence; New-Keynesian Model; Forecast Heuristics; Simulated Method of Moments (search for similar items in EconPapers)
JEL-codes: C53 D83 E12 E32 (search for similar items in EconPapers)
Date: 2017
New Economics Papers: this item is included in nep-cbe, nep-mac and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://www.econstor.eu/bitstream/10419/157258/1/884607283.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:zbw:cauewp:201704

Access Statistics for this paper

More papers in Economics Working Papers from Christian-Albrechts-University of Kiel, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by ZBW - Leibniz Information Centre for Economics ().