Research Paper National Institute of Economic and Social Research Discussion Papers: New Series 286
Qualitative expectational data as predictors of income and consumption growth: micro evidence from the British Household Panel Survey
The putative ability of consumer sentiment or expectational data to predict movements in consumption and income growth data is exploited widely by policymakers. But the informational content of these data has been little studied at the micro-level since they are often collected by cross-sectional rather than panel surveys and moreover are often published in aggregated form. This paper establishes at a micro-economic level whether expectational data are predictors of income and consumption growth, and whether they contain information additional to that already contained in past income and consumption data. This is conducted using panel structural vector autoregressive models, and exploits hitherto largely uninvestigated individual-level expectational data from the BHPS. Thereby we also shed light on whether consumers set their consumption patterns consistent with the rational expectations permanent income hypothesis. We conclude that the predictive power of the expectational data are quite weak when one controls for lagged income and consumption movements.