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The Effect of Consumer Sentiment on Consumption

Author

Listed:
  • Christian Gillitzer

    (Reserve Bank of Australia)

  • Nalini Prasad

    (School of Economics, University of New South Wales)

Abstract
This paper seeks to identify whether changes in consumer sentiment have a direct effect on consumption. In order to demonstrate a causal effect running from sentiment to consumption we need to identify changes in sentiment that are likely to be unrelated to other factors simultaneously affecting sentiment and consumption. To do this, we take advantage of the fact that immediately after elections at which there is a change of government consumers supporting the winning party report substantially more optimistic expectations about both personal and general economic conditions than supporters of the losing party. Following a change of government, we find robust evidence that supporters of the winning party report higher spending intentions than supporters of the losing party, providing evidence that consumer sentiment has a causal effect on consumption. We also find evidence that, following changes of government, motor vehicle purchases increased by relatively more in postcodes with a greater share of votes for the winning party. This provides evidence that self-reported spending intentions are indicative of actual consumption behaviour. Because the share of supporters for the government and the opposition is similar, the variation in sentiment that we use for identification is not evident at the national level. Thus, our results do not imply that changes of government have a noticeable effect on aggregate consumption. However, they do imply a causal effect that can run from sentiment to consumption.

Suggested Citation

  • Christian Gillitzer & Nalini Prasad, 2016. "The Effect of Consumer Sentiment on Consumption," RBA Research Discussion Papers rdp2016-10, Reserve Bank of Australia.
    • Handle: RePEc:rba:rbardp:rdp2016-10
    as

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    File URL: https://www.rba.gov.au/publications/rdp/2016/pdf/rdp2016-10.pdf
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    References listed on IDEAS

    as
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    Cited by:

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    2. Łukasz Gębski, 2021. "The Impact of the Crisis Triggered by the COVID-19 Pandemic and the Actions of Regulators on the Consumer Finance Market in Poland and Other European Union Countries," Risks, MDPI, vol. 9(6), pages 1-15, June.
    3. Jess Benhabib & Ben Shapiro & Mark M. Spiegel, 2018. "How Persistent Are the Effects of Sentiment Shocks?," FRBSF Economic Letter, Federal Reserve Bank of San Francisco.

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    More about this item

    Keywords

    consumer sentiment; Australia;

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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