Abstract
This paper offers a pioneer attempt to unveil the time-varying impact of consumer confidence on GDP growth. The empirical analysis is based on a state space model with time-varying coefficients, which is employed on a dataset from 11 New EU Member States. It is shown that the impact of consumer confidence (reflecting the overall uncertainty level in the country) skyrockets in the 2008 Great Recession, providing evidence that the recent crisis was to some extent psychologically governed. After that, the influence of consumer confidence on GDP mostly stabilizes at earlier levels. The EU accession seems not to play an important role in the observed relationship. The obtained conclusions are quite robust across countries and remain intact upon the inclusion of additional control variables in the model. A possible solution for keeping the psychological determinants of the crisis under control is a prompt, coherent, and clearly communicated crisis management policy, which might help preventing a momentous drop of consumer confidence and overall uncertainty.
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Notes
An alternative survey-based uncertainty proxy would be e.g. the Economic Sentiment Indicator, but its calculation started in as late as 2008 for some of the analyzed countries. This would disable the analysis of its relevance in the crisis period.
In calculating \(CCI\), Q7 is taken with an inverted sign for the purpose of easier interpretation. The response balance is defined as a weighted difference of positive and negative response shares, and is calculated as \(B = \left( {PP + 0.5P} \right)\text -\left( {0.5M + MM} \right)\). B is the balance statistics, PP is the percentage of respondents that chose the extremely positive answer (e.g. answer a) in Q2), P is the share of examinees that replied positively (b in Q2), M is the percentage of negative answers (d in Q2) and MM is the percentage of extremely negative answers (e in Q2). For more details on response balances and \(CCI\) calculation, see European Commission (2014).
For a more detailed explanation of the diffuse Kalman filter, see e.g. (De Jong 1991).
This should also be put in relation to the fact that consumer surveys (used to quantify consumer confidence) are administered in the first two weeks of each month. The data on economic activity is, on the other hand gathered by the sole end of each month (industrial production and retail trade) or the end of each quarter (GDP). Additionally, CCI figures are publicly available from the European Commission in the final week of each month, while Eurostat releases GDP data with a considerable time delay of about 2 months.
Unit root test results are left out here for brevity purposes, but can easily be obtained from the authors.
Bulgaria recorded the lowest \(CCI\) volatility (as measured by the standard deviation), but at extremely low levels of consumer confidence (see the mean figures).
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This work has been fully supported by the Croatian Science Foundation under the project No. 3858.
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Sorić, P. Consumer confidence as a GDP determinant in New EU Member States: a view from a time-varying perspective. Empirica 45, 261–282 (2018). https://doi.org/10.1007/s10663-016-9360-4
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DOI: https://doi.org/10.1007/s10663-016-9360-4