EU Consumer Confidence and the New Modesty Hypothesis

Petar Sorić, Mirjana Čižmešija and Marina Matošec
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Marina Matošec: University of Zagreb

Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, 2020, vol. 152, issue 3, No 4, 899-921

Abstract: Abstract Voices have been raised that the link between economic sentiment and hard macroeconomic data has considerably weakened over time, bringing agents’ macroeconomic assessments of normal growth to a more modest, new normal level. We empirically test this hypothesis by linking consumer confidence to consumption growth for all individual EU member states, as well as for the EU and the euro area. Applying a battery of nonlinear econometric techniques, we find that normal consumption growth rates (as assessed by consumers) have recorded a long-term decline in about half of countries (dominantly old EU member states), while all other economies either contradict such a hypothesis or exhibit intermittent intervals of increasing and decreasing normal growth. Our calculations reveal that normal consumption growth rates are highly positively related to macroeconomic volatility, reflecting the postulates of psychophysics. In that sense, the new modesty hypothesis can to some extent be attributed to the Great Moderation era, which has diminished consumers’ perceptive reactions to macroeconomic stimuli.

Keywords: Consumer surveys; Time-varying parameter model; Structural break; Great Moderation (search for similar items in EconPapers)
JEL-codes: C14 D12 E71 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1007/s11205-020-02449-x

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