Consumer confidence and business cycles : a casy study for the Netherlands : are business cycles driven by animal spirits?

Abstract

In this paper, an attempt is made to explore the relevance of a consumer confidence index in forecasting business cycles in the Netherlands. Furthermore, the possible heterogeneity regarding the information content of individual questions is addressed, and it is investigated whether this information can be attributed to the information view or to the animal spirits view. This paper constructs a Bayesian VAR (BVAR), which includes a consumer confidence index, the unemployment rate, a composite leading indicator, producer confidence, and the Michigan consumer sentiment index. The results show that for the 24-month-ahead forecast and the 48-month-ahead forecast of unemployment, consumer confidence explains respectively 3.96% - 8.06% and 10.25% - 15.99% of the error variance. Moreover, there seems to be significant heterogeneity among the individual questions in the consumer confidence survey. Finally, it is concluded that the additional predictive power of consumer confidence can be attributed to the information view.