Forecasting Consumption: The Role of Consumer Confidence in Real Time with Many Predictors

Journal of Applied Econometrics, 2015

32 Pages Posted: 17 Jul 2015

See all articles by Kajal Lahiri

Kajal Lahiri

State University of New York (SUNY) at Albany

George Monokroussos

Joint Research Centre, Italy

Yongchen Zhao

Towson University - Department of Economics

Date Written: July 15, 2015

Abstract

We study the role of consumer confidence in forecasting real personal consumption expenditure, and contribute to the extant literature in three substantive ways: First, we reexamine existing empirical models of consumption and consumer confidence not only at the quarterly frequency, but using monthly data as well. Second, we employ real-time data in addition to commonly used revised vintages. Third, we investigate the role of consumer confidence in a rich information context. We produce forecasts of consumption expenditures with and without consumer confidence measures using a dynamic factor model and a large, real-time, jagged-edge data set. In a robust way, we establish the important role of confidence surveys in improving the accuracy of consumption forecasts, manifesting primarily through the services component. During the recession of 2007-09, sentiment is found to have a more pervasive effect on all components of aggregate consumption - durables, non-durables and services.

Keywords: Forecasting, Consumption, Consumer Sentiment, Factor Models, Kalman Filter, Real-Time Data, Fluctuation test

JEL Classification: C53, E21, E27

Suggested Citation

Lahiri, Kajal and Monokroussos, George and Zhao, Yongchen, Forecasting Consumption: The Role of Consumer Confidence in Real Time with Many Predictors (July 15, 2015). Journal of Applied Econometrics, 2015, Available at SSRN: https://ssrn.com/abstract=2631745

Kajal Lahiri (Contact Author)

State University of New York (SUNY) at Albany ( 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

George Monokroussos

Joint Research Centre, Italy ( email )

Via E. Fermi 1
I-21020 Ispra (VA)
Italy

Yongchen Zhao

Towson University - Department of Economics ( email )

Towson, MD 21204
United States

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