On the dynamics of U.S. consumer sentiment and economic policy assessment

ABSTRACT

We utilize the Michigan Surveys of Consumers data to first investigate the dynamic relationship between consumers’ assessment of current and future economic conditions (Index of Current Economic Conditions (ICC) and Index of Consumer Expectations (ICE)), and then examine how these assessments are influenced by deterioration/improvement in consumers’ appraisal of economic policies of the government (GP). We further assess how deterioration/improvement in ICC and ICE influences GP. For 1978–2015, our findings first indicate that ICC and ICE are cointegrated and both respond to disequilibrium to restore the long-run equilibrium relationship. Second, deterioration in GP results in deterioration in both ICC and ICE. Improvement in GP, however, results in improvement in ICE with no impact on ICC. Third, deterioration in both ICC and ICE results in deterioration in GP. Improvement in ICE results in improvement in GP, but improvement in ICC has no impact on GP. The observed asymmetries are in line with ‘negativity bias’, whereby people tend to give more weight to negative events than to positive ones.

KEYWORDS:

• Consumer behaviour
• government policy
• asymmetry
• negativity bias

JEL CLASSIFICATION:

• D12
• E32
• E58

Acknowledgement

The authors would like to thank two anonymous referees for helpful comments and suggestions.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ We have utilized as instruments the predetermined variables in the VECM in addition to the ranks of ΔICE_t, d₁|ΔGP_t|, and (1 − d₁)ΔGP_t for estimating Equation (1), and the ranks of ΔICC_t, d₁|ΔGP_t|, and (1 − d₁)ΔGP_t for estimating Equation (2). The use of the rank is intended to increase the efficiency of the TSLS estimates (Baghestani 1991).

² For the TSLS estimation, we have utilized as instruments the predetermined variables in Equation (3) in addition to the ranks of d₂|ΔICC_t|, (1 − d₂)ΔICC_t, d₃|ΔICE_t|, and (1–d₃)ΔICE_t.