Consumer Sentiment and Confidence during Post-Crisis 2008: A Panel Data Analysis

Background

Economic theories recognize the importance of expectations for aggregate economic behaviour. Few influential economic thinkers of the past century attributed explicitly to the volatility of expectations as a crucial factor in explaining the existence and depth of business cycles. Keynes emphasized in the General Theory the importance of changes in expectations that are motivated by “animal spirits”, not by rational probabilistic calculation. In particular, entrepreneurs’ animal spirits related to their investment decisions were theorized of being a major determinant of economic fluctuations. Pigou (1927) also thought of business cycles as being largely driven by expectations. He stressed entrepreneurs’ errors of optimism and pessimism as key drivers of fluctuations in real activity. Expectations play an important role in modern state-of-the-art general equilibrium models. Expectations are almost universally modelled as formed according to the rational expectations hypothesis. As a result, at least in models with determinate equilibrium, errors (due to expectation) can be solved out as a function of fundamental shocks and they disappear as autonomous sources of dynamics. Hence, there is typically no scope for fluctuations in expectations in the spirit of those emphasized by Keynes, which are driven by animal spirits, market psychology, sentiment, or by any shift in expectation that cannot be reconnected to original structural disturbances. In this study, we focus on sentiment especially on consumer’s sentiment and also consumer confidence that is measured as consumer confidence index (CCI). Now, we discuss on consumer confidence.