Forecasting Components of Consumption with Components of Consumer Sentiment |
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Authors: | James A Wilcox |
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Institution: | (1) Haas School of Business, University of California, Berkeley, CA 94720, USA |
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Abstract: | We present new evidence that existing, but long-ignored,
measures of consumer sentiment can reduce errors in forecasting
total consumption expenditures and its components.
The component questions of the aggregate Index of
Consumer Sentiment improve forecasts, not only of consumer
expenditures on durables but also on non-durables and services. Empirical studies have historically focused
on whether consumer sentiment improves one-quarterahead
forecasts of consumer expenditures. In fact, we document
that measures of consumer sentiment are especially
predictive at the longer, four-quarter-ahead horizon. In
addition, they typically contribute at least as much to
one-quarter-ahead and four-quarter-ahead forecasts of
consumption as do income and wealth variables. Out-ofsample
forecasts for the 2000-2005 period further substantiate
that measures of consumer sentiment can reduce
consumption forecasting errors appreciably.
JEL Classification C53,E21 |
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Keywords: | forecast consumption consumer sentiment |
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