Frequency Domain Analysis of Consumer Confidence, Industrial Production and Retail Sales for Selected European countries/Vartotoju Pasitikejimo, Pramonines Gamybos Ir Mazmenines Prekybos Dazniu Analize Pasirinktose Europos Salyse
Mermod, Asli Yuksel, Dudzeviciute, Gitana, Journal of Business Economics and Management
Consumer confidence / sentiment is commonly described as a leading economic indicator. In its simplest sense, such an indicator is defined as any economic statistic, which possesses information on the current and future path of an economy, Tvaronaviciene et al. (2009). According to the surveys of Tvaronaviciene and Grybaite (2007), Tvaronavicius and Tvaronaviciene (2008), such statistics receive widespread attention from experts, investors and business and financial press as economic agents may amend consumption / investment strategies depending on the pattern of leading indicators. Therefore, public and /or private institutions in many developed /emerging countries have constructed consumer confidence indices (CCI) to measure and disseminate the latest stance of consumer attitudes (1).
The analysis of consumer confidence advocates the positive relationship between consumer optimism and the future path of consumption expenditures. Among others, Carroll et al. (1994), Bram and Ludvigson (1998), Hiifner and Schroder (2002) and Kwan and Cotsomitis (2006) provide support for the link between changes in consumer attitudes and personal consumption expenditures. However, the bulk of the literature mainly focuses on developed countries and the expectations-consumption channel where consumer confidence is modeled as strictly exogenous (2). Recently, Gomes (2007) emphasizes the inherent characteristics of endogenous growth models that rely on the optimization problem of a consumption utility maximizing representative agent. In such a theoretical setting, economic agents are expected to increase (decrease) their propensity to consume in expansionary (recessionary) periods. Hence, an increase in consumer confidence should lead to an increase in total retail sales and economic growth given that the survey responses are unbiased and there is no attrition problem.
The originality of this study is twofold: First, the research object of our study is to investigate the direct link between consumer confidence, economic growth and retail sales for the case of several countries, including both developing and developed countries. Second, as research methodology, we use spectrum analysis tools such as causality in frequency domain and spectral variance decompositions. We employ the consumer confidence indexes, industrial production (as a proxy for economic growth) and retail sales (as a proxy for the consumer expenditures) to provide insights into the transmission mechanism of changes in the consumer confidence, the response of domestic production and retail sales in selected countries. Our analysis would also shed light to the differences in this transmission mechanism between developed and developing countries.
The second section of this paper includes a brief literature survey on consumer confidence. Section three explains the data of our analysis. In section four, we introduce the methodology of empirical analysis, followed by section five, where we will present and explain the empirical findings. Section six will conclude with some remarks for further research.
2. Literature survey
There are two distinctive categories of literature on consumer confidence. The first could be termed as conventional with its focus on the predictive ability of consumer confidence while searching an answer to the well-known question: "Does consumer sentiment accurately forecast household spending?" Among others, Acemoglu and Scott (1994); Carroll et al. (1994); Fan and Wong (1998); Kwan and Cotsomitis (2004) constitute some of this orthodox approach. The second category includes studies that employ anything outside the orthodox realm (Among others, see Flavin 1991; Alessie, Lusardi 1997; Batchelor, Dua 1998; Souleles 2004).
The orthodox approach argues that improvements in consumer sentiment stimulate consumption growth in the short run. Therefore, the starting point for these studies is to obtain the goodness-of-fit values from regressions of the growth of various measures of household spending on lagged values of consumer confidence using the following equation: