Abstract
Following the tradition of George Katona, this study utilizes consumer surveys to extract indicators of ability to consume and willingness to consume for 28 European economies. A function of durables consumption is specified, acknowledging the potentially important role of nonlinearities, which have insofar been neglected in the literature. The estimated state space models reveal that the effects of both stated subjective concepts exhibit considerable time-variability. Their impact seems to be heavily dependent on the business cycle, with an intensification of the observed relationship during recessions. Further on, nonlinear autoregressive distributed lag modelling indicates significant asymmetries in the impact of ability to consume: household expenditure generally reacts more strongly to negative than to positive changes of the stated variable. To that end, the presented specifications corroborate the main postulate of prospect theory. On the other hand, willingness to consume does not exhibit such pronounced asymmetry. Finally, the detected nonlinearities are exclusively transitory, reaffirming animal spirits as a short-run predictor of economic behavior.
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Notes
Although not directly related to Katonian concepts of ability to buy and willingness to buy, one might also be interested in the study of Baghestani (2021), who finds that consumers’ buying attitudes convey relevant information for predicting US durables spending.
It should be noted that asymmetric adjustment is not only a characteristic of willingness to buy, but also of the general construct of consumer confidence (Paradiso, Kumar, and Margani 2014).
Response balance (\(B\)) is a weighted difference between the percentages of respondents giving positive and negative answers to a particular survey question: \(B=\left(PP+\frac{1}{2}P\right)-\left(\frac{1}{2}M+MM\right)\). It is a common tool for quantifying CS results (European Commission 2021). For a more thorough overview of CS, see Curtin (2019).
It is customary in CS analysis to express reference macroeconomic series in year-on-year growth rates (European Commission, 2021: 15). This stems from the sole formulation of survey questions over the 12 months forecasting horizon (see Q2 and Q9 as examples).
Since consumption data is published quarterly, we expressed all other variables in quarterly frequencies (using a simple average of the three corresponding monthly figures).
We additionally applied the 2SLS approach (instrumenting ability to buy and willingness to buy with their own four lags). The procedure mostly revealed no significant endogeneity in the examined model, and the obtained results did not change much. We do not report the obtained results for brevity purposes.
Very similar results are also obtained using the NARDL model. The results are available upon request.
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This work has been fully supported by the Croatian Science Foundation under the project IP-2018-01-4189.
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Sorić, P. Ability to consume versus willingness to consume: the role of nonlinearities. Empirica 49, 663–689 (2022). https://doi.org/10.1007/s10663-022-09535-y
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DOI: https://doi.org/10.1007/s10663-022-09535-y
Keywords
- Ability to consume
- Willingness to consume
- Personal consumption
- Time-varying parameters
- Nonlinear autoregressive distributed lag model