When Should We Care About Consumer Sentiment? Evidence from Linear and Markov-Switching Models

Indian Economic Review, Vol. 36, No. 1, January-June 2001

Posted: 13 Jan 2003

See all articles by Detelina Ivanova

Detelina Ivanova

SUNY at Albany, College of Arts and Sciences, Economics

Kajal Lahiri

State University of New York (SUNY) at Albany, College of Arts and Sciences, Economics

Abstract

Using monthly data over 1978:01-1996:12 we examine the usefulness of the Index of Consumer Sentiment (ICS) in predicting aggregate consumption expenditure and its components. Bivariate causality tests in a linear model show the indicator value of ICS in predicting durables consumption. We propose Markov-switching models that differentiate between regimes of high and low consumption volatility where the former regime is characterized by a strong and markedly different relationship between consumption and ICS. We conclude that the benefits from including consumer sentiment in models of consumption are largest in periods when conflicting economic and sociopolitical news costs high overall uncertainty and wide swings in near term expectations of personal income. These high volatility periods are not always related to recessions. Interestingly, ICS loses its predictive power in the presence of forward-looking financial variables such as interest rate spreads and stock returns in linear as well as Markov-switching models.

Keywords: Consumption, Volatility, Markov-Switch VAR model, Michigan Survey, Consumer Confidence

JEL Classification: C22, D12, E27, E32

Suggested Citation

Ivanova, Detelina and Lahiri, Kajal, When Should We Care About Consumer Sentiment? Evidence from Linear and Markov-Switching Models. Indian Economic Review, Vol. 36, No. 1, January-June 2001. Available at SSRN: https://ssrn.com/abstract=342040

Detelina Ivanova

SUNY at Albany, College of Arts and Sciences, Economics ( email )

BA 110 1400 Washington Ave.
Albany, NY 12222
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518-442-4759 (Phone)
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Kajal Lahiri (Contact Author)

State University of New York (SUNY) at Albany, College of Arts and Sciences, Economics ( email )

Department of Economics
1400 Washington Avenue
Albany, NY 12222
United States
518-442 4758 (Phone)
518-442 4736 (Fax)

HOME PAGE: http://www.albany.edu/~klahiri

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