EU Consumer Confidence and the New Modesty Hypothesis
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EU Consumer Confidence and the New Modesty Hypothesis Petar Sorić1 · Mirjana Čižmešija1 · Marina Matošec1 Accepted: 17 July 2020 © Springer Nature B.V. 2020
Abstract Voices have been raised that the link between economic sentiment and hard macroeconomic data has considerably weakened over time, bringing agents’ macroeconomic assessments of normal growth to a more modest, new normal level. We empirically test this hypothesis by linking consumer confidence to consumption growth for all individual EU member states, as well as for the EU and the euro area. Applying a battery of nonlinear econometric techniques, we find that normal consumption growth rates (as assessed by consumers) have recorded a long-term decline in about half of countries (dominantly old EU member states), while all other economies either contradict such a hypothesis or exhibit intermittent intervals of increasing and decreasing normal growth. Our calculations reveal that normal consumption growth rates are highly positively related to macroeconomic volatility, reflecting the postulates of psychophysics. In that sense, the new modesty hypothesis can to some extent be attributed to the Great Moderation era, which has diminished consumers’ perceptive reactions to macroeconomic stimuli. Keywords Consumer surveys · Time-varying parameter model · Structural break · Great Moderation JEL Classification C14 · D12 · E71
1 Introduction This paper builds upon the signal extraction problem (Lucas 1973) as one of the methodological workhorses of new classical economics. In essence, Lucas (1973) questions agents’ ability to properly assess changes in the macroeconomic system.1 1 The original contribution of Lucas (1973) focuses on firms’ capability of separating aggregate from relative price changes.
Electronic supplementary material The online version of this article (https://doi.org/10.1007/s1120 5-020-02449-x) contains supplementary material, which is available to authorized users. * Petar Sorić [email protected] 1
Faculty of Economics and Business, University of Zagreb, Trg J. F. Kennedyja 6, 10000 Zagreb, Croatia
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Namely, European Commission (2016a, 2017, pp. 52–54) has noticed that the link between agents’ economic sentiment and actual macroeconomic data has changed over time to a more modest, new normal level. This kind of a new modesty hypothesis (NMH) has later on been more thoroughly analyzed and supported by empirical evidence of Gayer and Marc (2018) and Bruno et al. (2019). These findings firmly relate to the famous Lucas Jr. (1976) critique, postulating that parameters obtained within econometric models should be time-varying. Shifts in agents’ expectations might occur due to any kind of policy modifications or structural changes in the economic system. What might then be the economic changes that possibly triggered NMH? Some of the plausible explanations would include the era of Great Moderation, i.e. the long-term reduction of macroeconomic volatility since the 1980s (McConnell and Perez-Qui
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