Consumer Sentiment and Consumer Spending: Decomposing the Granger Causal Relationship in the Time Domain

21 Pages Posted: 26 Mar 2008

See all articles by Sarah Gelper

Sarah Gelper

KU Leuven - Faculty of Business and Economics (FEB)

Aurelie Lemmens

Rotterdam School of Management, Erasmus University Rotterdam

Christophe Croux

KU Leuven - Faculty of Business and Economics (FEB)

Date Written: 2007

Abstract

It is often believed that the consumer sentiment index has predictive power for future consumption levels. While Granger causality tests have already been used to test for this, no attempt has been made yet to quantify the predictive power of the consumer sentiment index over different time horizons. In this paper, we decompose the Granger causality at different time lags, by looking at a sequence of nested prediction models. Since the consumer sentiment index turns out to be cointegrated with real consumption, we resort to Error Correcting Models. Four consumption series are studied, namely total real consumption, real consumption of durables, nondurables and services. Among other findings, we show that the consumer sentiment index Granger causes future consumption with an average time lag of four to five months. Furthermore, t is found that the consumer sentiment index has more incremental predictive power for consumption of services than for consumption of durables or nondurables, and that the index is not only useful as a predictor at the very short term, but keeps predictive power at larger time horizons.

Keywords: Cointegration, Consumer Sentiment, Granger Causality, VEC models

JEL Classification: C32, E21

Suggested Citation

Gelper, Sarah and Lemmens, Aurélie and Croux, Christophe, Consumer Sentiment and Consumer Spending: Decomposing the Granger Causal Relationship in the Time Domain (2007). Applied Economics, Vol. 39, No. 1, 2007. Available at SSRN: https://ssrn.com/abstract=1113111

Sarah Gelper (Contact Author)

KU Leuven - Faculty of Business and Economics (FEB) ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

Aurélie Lemmens

Rotterdam School of Management, Erasmus University Rotterdam ( email )

3000 DR Rotterdam
Netherlands

Christophe Croux

KU Leuven - Faculty of Business and Economics (FEB) ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

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