Can Consumer Economic Sentiment Indicator Predict Consumption Expenditure in the Eurozone

Shokoofeh Fazel, Zayed University
Farzad Farsio, Zayed University

Document Type

Article

Publication Date

1-1-2015

Abstract

This paper investigates the relationship between consumers' expectations and consumption expenditure in Eurozone countries. While some studies have examined the impact of consumers' expectations on consumption expenditure, none concludes a clear positive relationship between these variables. It has been argued that consumers' expectations about the economy's future state should have an impact on consumers' decisions about how much to consume and how much to save. While consumers' expectations seem to be a strong predictor for future consumption expenditure, there are potential statistical problems with the use of current available estimates of consumers' expectations. In this paper, we hypothesize that due to these statistical problems, consumers' expectations in Eurozone countries measured by current available estimates such as Consumer Economic Sentiment Indicator (CESI) do not have explanatory power to predict future levels of consumption expenditure. We present empirical evidence that while disposable income is a good predictor for consumption expenditure, CESI is not a reliable predictor for future levels of consumption in Eurozone countries. Our empirical analysis is based on a multiple regression model and the Granger causality test. In our multiple regression model, the dependent variable is consumption expenditure, and the independent variables include disposable income and the level CESI. Monthly data for consumption expenditure, disposable income, and CESI in Eurozone countries are obtained from the European Commission Eurostat at http://epp.eurostat.ec.europa.eu. Our statistical analysis covers January 1995 through September 2014.

Disciplines

Business

Indexed in Scopus

no

Open Access

no

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