Does Consumer Confidence Forecast Household Spending?

David Dion

MPRA Paper from University Library of Munich, Germany

Abstract: The traditional consumption function based on the life cycle permanent income hypothesis (LC-PIH) considers that consumer spending is based on households’ expectations of their future income. However, in short-term forecasting, the traditional economic determinants of consumption do not perform accurately. In addition to these macroeconomic variables, a measure of uncertainty is needed to better assess the short-term dynamics of the consumption function. Such a measure of uncertainty may be given by households’ expectations about their personal financial situation and general economic situation. A measure of these expectations is provided by consumer confidence (measured by the Consumer Confidence Index - CCI). In addition, consumer confidence seems to contain both a forecasting and independent explicative ability to predict consumption. Economic variables do not fully explain confidence, suggesting that its independent explicative power stems from its idiosyncratic features. We discuss in detail these features thanks to a review of the theoretical and empirical literature by discussing the consistency of consumer confidence with the standard consumption theory, analysing the determinants of the CCI and studying the predictive and causal power of the CCI.

Keywords: Consumer confidence; consumption function; forecasting (search for similar items in EconPapers)
JEL-codes: C52 C53 D11 D12 E21 E27 (search for similar items in EconPapers)
Date: 2006-11-22
New Economics Papers: this item is included in nep-for and nep-mac
References: View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:902

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