Three papers on UK households' consumption

Abstract

This paper assesses whether consumer con dence measured by the GfK consumer confidence index, can help explain consumer behaviour using British households data. We assume that the index contains some private information not captured by other economic factors. Using the continuous Household Expenditure Survey for years 1986- 2015, the Euler equation is constructed to estimate the marginal propensity to consume. The model is augmented to include the consumer confidence indicator measured by GfK index, a variable which measures consumer sentiment. We construct a pseudo-panel using age cohorts for each quarter for total consumption and non-durable consumption. We regress changes in consumption against changes in income while controlling for household characteristics. As well as finding that the marginal propensity to consume from predictable changes in income is higher than would be predicted by the Permanent Income Hypothesis, the paper also finds that including the consumer confidence index can improve the ability to predict changes in consumption.