Academic journal article European Research Studies

Consumer Confidence on Heating Oil Prices: An Empirical Study of Their Relationship for European Union in a Nonlinear Framework

Academic journal article European Research Studies

Consumer Confidence on Heating Oil Prices: An Empirical Study of Their Relationship for European Union in a Nonlinear Framework

Article excerpt

1. Introduction

The recent financial crisis appeared for first time in USA and spread all over the world with the assistance of different economic mechanisms. According to Stiglitz (2008), the crisis was closely related to the concept of consumer sentiment. Consumer confidence according to previous studies (Starr, 2012) is highly correlated with real economy while within the last decade, the confidence indexes have attracted the attention of market analysts, policy makers and macroeconomists.

The importance and value of consumer confidence indexes have been stressed in a number of researches, many of which have focused on the explanatory and their prediction ability in relation to consumption (Katona, 1975; Acemoglu and Scott, 1992; Huth et al., 1994; Carroll et al., 1994; Bram and Ludvigson, 1998; Eppright et al., 1998; Ludvigson, 2004; Dees and Soares Brinca, 2011).

The issue of consumption has become highly interesting for the researchers after the second world war while a number of theories have been developed for its interpretation, with the most worthy to be the following; the relative income hypothesis by Duesenberry (1948), the life cycle hypothesis by Modigliani and Brumbergh (1954) and permanent income hypothesis by Friedman (1957). These theories have been tested empirically and new or alternative theories have emerged. Based on Lucas's (1978) famous critique about the consumption function, Hall (1976) formulated the random walk model of consumption according to which under rational expectations, only unexpected changes in permanent income should affect current consumption and consequently the only available useful information at t- 1 is the consumption in order to predict consumption at time t (first order autoregressive process). Other empirical studies have introduced liquidity constraints and precautionary savings factors being attributed to the excess sensitivity of consumption to current income (Flavin, 1985; Zeldes, 1989; Jappelli and Pagano, 1989; Hahm 1999, Hahm and Steigerwald, 1999; Menegatti, 2010; Dees and Soares Brinca, 2011).

In addition, Katona (1975), Blanchard (1993), Acemoglu and Scott (1994), Eppright et al. (1998) and Akerlof and Shiller, (2008) have introduced the psychological and sociological approach to consumption. To be more specific, Katona argued that consumption is not only related with the ability to pay but also the willingness to pay, and confidence indices may capture social attitudes affecting perceptions of the economic environment apart from the environment itself. Acemoglu and Scott (1994) supported the view that a change in confidence can modify consumers' behavior in consumption in an upredictable way by economic variables, like income. Akerlof and Shiller, (2009) based Keynes, (1936) claimed that animal spirits] in consumer and business confidence are highly significant in understanding economic fluctuations. Therefore, investment decisions are not based on quantitative data of future profits and stylized facts but rather on feelings (Braley et al., 2009; Black et al., 2009).

Furthermore, an insight to the consumer confidence indices involves not only the interpretation of consumption, but also their predictability on fluctuations in economy (Blanchard 1993; Matsusaka and Sbordone 1995; Howrey 2001; Haugh 2005; Afshar et al., 2011). Barsky et al. (2009 and 2012) and Vuchelen (2004) have studied the relationship of consumer confidence with macroeconomic aggregate variables such as unemployment, growth rate, interest rates and exchange rates, while Bachmann and Sims (2011), argue that confidence plays a role in government spending, especially during economic recessions. Another strand of the empirical literature has focused on the interaction of confidence indexes with the stock market (Fisher and Statman 2003; Qiu and Welch 2005; Baker and Wurgler 2006, Lemmon and Portniaguina 2006; Schmeling, 2009; Chung et al., 2012).

It is broadly believed that the way an economy behaves is closely related to rational expectations of economic agents. …

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