THE EFFECT OF CONSUMER CONFIDENCE ON AGGREGATE HOUSEHOLD CONSUMPTION AND LEVERAGE

Abstract

Consumer confidence measures and their effects on macroeconomic variables have been subject to extensive research since it was devised in the 1940s. Some empirical studies suggest that it is one of the leading causes of macroeconomic fluctuations through its effects on household consumption. Particularly, consumer durables spending and household borrowing are found to be sensitive to consumer confidence. In this study, a stock-flow-consistent system dynamics model is developed to explain how consumer confidence affects the aggregate household behavior and the macroeconomic dynamics of the economy. The simulation results confirm that consumer confidence strongly affects the economy's dynamic behavior. It is shown that the psychological and structural parameters determine the stability properties of the economy.