Macquarie University

Does Sentiment Explain Consumption?

Email address: tbryant@efs.mq.edu.au

Keywords: Consumption, sentiment.

JEL Classifications: C51, D24

Abstract:
In an interesting study, Carroll, Fuhrer and Wilcox (1994) examine the capacity of an index of consumer sentiment to help explain the behaviour of various categories of consumption. The results reported by Carroll, Fuhrer and Wilcox (1994) along with the implications for consumption theories, which these results contain, raise important issues, which deserve careful theoretical and empirical study. Our contribution to such a study is twofold. Firstly, we establish that it is possible to establish theoretical reasons why there might be an influence running from consumer sentiment to consumption expenditure. We do this by extending a model of consumer decision making suggested by Benassy (1986). Secondly, we reconsider the empirical question raised by Carroll, Fuhrer and Wilcox (1994) of whether there is an independent influence running from sentiment to consumption, in fact, once a carefully specified consumption function is developed and used as the 'test bed' for the analysis. We are motivated to do this because although the Carroll, Fuhrer and Wilcox (1994) analysis is stimulating, it is based on a relatively ad hoc specification of the aggregate consumption function, a specification that arguably suffers from omitted variable bias, something which, in the limit, may invalidate their findings. In this paper a carefully specified model of aggregate consumption in Australia is used as the baseline against which consumer sentiment is tested for independent explanatory power.

PDF file of paper: bryant.pdf

Session: Consumer Demand Behavior

Time: Sunday, 8 July, 2:15pm - 3:45pm

Room: D