Consumer Confidence and Household Investment
Hashmat Khan (),
Jean-François Rouillard () and
Santosh Upadhayaya ()
Additional contact information
Santosh Upadhayaya: Carleton University
Cahiers de recherche from Departement d'Economique de l'École de gestion à l'Université de Sherbrooke
Household investment displays a robust leading indicator property over the US business cycle. It has been challenging to account for this stylized fact. In this paper, we develop the hypothesis that consumer confidence drives household investment. Using a surveybased consumer confidence measure for 1960Q1–2017Q4 we find that it leads household investment by two quarters and housing starts by one quarter, lending support to the hypothesis. We then use VAR analysis to identify a confidence shock. Household investment increases and follows a persistent hump-shaped response after a positive confidence shock. The responses of total hours-worked and output also show a persistent increase and so do real house prices. Confidence shocks account for a substantial share of variation in household investment, total hours-worked and output. We show that household investment plays a quantitatively important role in the transmission of confidence shocks in the economy. Moreover, confidence shocks do not appear to be related to movements in future fundamentals, total factor productivity and the relative price of investment, representing supply side developments. Our findings, therefore, suggest that demand side forces originating in consumers’ social and psychological factors may be a fruitful direction for studying household investment dynamics and their relationship with the business cycle.
Keywords: Consumer confidence; Household investment; Confidence Shocks; Business cycles (search for similar items in EconPapers)
JEL-codes: D12 D83 D84 E22 E32 (search for similar items in EconPapers)
Pages: 48 pages
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:shr:wpaper:20-15
Access Statistics for this paper
More papers in Cahiers de recherche from Departement d'Economique de l'École de gestion à l'Université de Sherbrooke Contact information at EDIRC.
Bibliographic data for series maintained by Jean-François Rouillard ().