Does uncertainty matter for household consumption? A mean and a two tails approach

Abstract

This paper complements the existing literature on the relationship between uncertainty and private consumption expenditure for a panel of 14-euro area countries over the period 1997 to 2021. We account for uncertainty by employing composite, economic and financial risk indices and utilize alternative panel estimators with heterogeneous coefficients and an error term to consider cross-country heterogeneity. Further, we explore the effect of uncertainty on household consumption over its conditional distribution. In addition, considering the differences in economic and financial systems across the countries examined, we gauge the heterogeneous effects of uncertainty on household consumption spending. The empirical evidence substantiates the impact of uncertainty on consumption expenditures and uncovers a significant effect between uncertainty and consumption expenditure along the conditional consumption distribution. Notably, this finding appears to be stronger for the lower quantiles of the consumption distribution, reckoning the presence of asymmetries in the relationship. Our analysis has documented the importance of uncertainty in understanding and explaining consumption behavior.