Abstract: Consumer Confidence Index CCI plays an important role through providing decision makers and economic forecasters with required information about present and future economic condition. These indices play a unique role in determining public policies as well as business decisions. Consumer confidence index defines the degree of optimism on the current state of the economy that consumers are expressing through their activities of saving and spending which lead to economic growth of the country.
Positive changes in consumer confidence should lead to the economic growth while negative changes impede the economic growth of the countries. This study is an attempt to empirically evaluate the link between the CCI and economic growth of the selected European countries: United Kingdom, Germany, France, Denmark and Netherland. Panel co-integration procedures are applied to establish the long run relationship between the CCI and economic growth for the period of 1 4.
Empirical results show the existence of the long run relationship between consumer confidence and economic growth. Keywords: Consumer Sentiments; Consumption; Growth. Consumption behavior plays a key role in macroeconomic modeling, it is crucial to analyze how consumer confidence stimulates the economic behavior.
Many researchers have tried to explore the link between macroeconomic variables and consumer confidence indices CCI. The present condition component can be associated with the economic activity while the expectation component can be related to the growth rate Ludvigson, Li, established the causal relationship between consumer expectations and industrial output growth in China.
Consumer expenditures depend on power to purchase as well as willingness to purchase Katona Ability to buy refers to the objective factors that determine the expenditures of the consumer and includes financial assets and access to credit and willingness to purchase captures the subjective factor and depends mainly on behavior and hopes about personal finances and the economy as a whole.
Positive changes in consumer confidence enhance the economic growth of the country and vice versa. In literature, CCI has been used in predicting the consumer expenditure, asset pricing, stock market and oil price etc. This study is an attempt to analyze the link between the consumer sentiments and the economic growth empirically for the selected European countries namely United Kingdom, Germany, France, Denmark, Italy and Netherland for the period of 1 4.
Literature Review. These indicators determine the actions of the people about the present and future economic condition of the economy. It is a useful indicator for policy makers, investors and business owners of a country. Consumer confidence has significant effect on economic growth of Japan for monthly and quarterly data, Utaka, Li, assessed the predictive power of consumer confidence indicators for macroeconomic variations. Consumer expectations individually or combination with other macroeconomic variables Granger cause the growth rates of industrial output.
Abaidoo, established the causal connection between consumer sentiments and fixed private investment growth for US economy. At the national level, ICA predicted the total personal consumption expenditure and various subcategories of consumer expenditure well. However, the predictability of ICA at the regional level was relatively weaker. On balance, consumer confidence is a reliable predictor of household spending in Canada.
The data for the aforementioned variables are taken from i Trading Economics, ii Euro Stat, and iii IFS for the time period of 1 4. The purpose of this study is to explore the long-run relationship between consumer sentiments and economic growth. This method produces asymptotically unbiased estimators under endogeneity and serial correlation. However, the null is rejected at first difference concluding that all variables are integrated of order one Table 1.
The panel cointegration tests proposed by Pedroni , have been applied and results are summarized in table 2. Interest rates can also affect exchange rates, which in turn will have effects on the export and import components of aggregate demand. Spelling out the details of these alternative policies and how they affect the components of aggregate demand can wait for The Keynesian Perspective chapter. Here, the key lesson is that a shift of the aggregate demand curve to the right leads to a greater real GDP and to upward pressure on the price level.
Conversely, a shift of aggregate demand to the left leads to a lower real GDP and a lower price level. Whether these changes in output and price level are relatively large or relatively small, and how the change in equilibrium relates to potential GDP, depends on whether the shift in the AD curve is happening in the relatively flat or relatively steep portion of the AS curve. It will shift back to the left as these components fall.
These factors can change because of different personal choices, like those resulting from consumer or business confidence, or from policy choices like changes in government spending and taxes. If the AD curve shifts to the right, then the equilibrium quantity of output and the price level will rise.
If the AD curve shifts to the left, then the equilibrium quantity of output and the price level will fall. Whether equilibrium output changes relatively more than the price level or whether the price level changes relatively more than output is determined by where the AD curve intersects with the AS curve.
Skip to content Chapter Learning Objectives By the end of this section, you will be able to: Explain how imports influence aggregate demand Identify ways in which business confidence and consumer confidence can affect aggregate demand Explain how government policy can change aggregate demand Evaluate why economists disagree on the topic of tax cuts.
Do imports diminish aggregate demand? Do economists favor tax cuts or oppose them? Self-Check Questions How would a dramatic increase in the value of the stock market shift the AD curve?
What effect would the shift have on the equilibrium level of GDP and the price level? Suppose Mexico, one of our largest trading partners and purchaser of a large quantity of our exports, goes into a recession. A policymaker claims that tax cuts led the economy out of a recession. Many financial analysts and economists eagerly await the press releases for the reports on the home price index and consumer confidence index. What would be the effects of a negative report on both of these? What about a positive report?
Review Questions Name some factors that could cause AD to shift, and say whether they would shift AD to the right or to the left. Would a shift of AD to the right tend to make the equilibrium quantity and price level higher or lower?
What about a shift of AD to the left? Critical Thinking Questions If households decide to save a larger portion of their income, what effect would this have on the output, employment, and price level in the short run?
What about the long run? If firms become more optimistic about the future of the economy and, at the same time, innovation in 3-D printing makes most workers more productive, what is the combined effect on output, employment, and the price-level?
Solutions Answers to Self-Check Questions An increase in the value of the stock market would make individuals feel wealthier and thus more confident about their economic situation. This would likely cause an increase in consumer confidence leading to an increase in consumer spending, shifting the AD curve to the right.
The result would be an increase in the equilibrium level of GDP and an increase in the price level. This decline in our exports can be shown as a leftward shift in AD, leading to a decrease in our GDP and price level. Tax cuts increase consumer and investment spending, depending on where the tax cuts are targeted. A negative report on consumer confidence would make consumers feel pessimistic about the future. Both of these would likely reduce consumer spending, shifting AD to the left, reducing GDP and the price level.
Howrey, E. Carroll, C. If So, Why? The Regional Economist addresses the regional, national and international economic issues of the day. Views expressed are not necessarily those of the St. Louis Fed or Federal Reserve System. Regional Economist. April 01, By Jeremy M Piger. Is the Infatuation Justified? Super-Powerful Data?
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