Consumer confidence and consumption in Sweden

The role of confidence indices in explaining consumption growth in Sweden during the period 1975-94 is analysed in this paper. We first analysed which variables i nfluence the levels of the confidence indices. Two important such factors are found to be changes in real interest rates and changes in the inflation rate. Of the two forward-looking indices considered, the one regarding the personal financial situation is found to be more closely related to changes in consumption than the index regarding the general economic situation. The latter has no additional information content in the presence of the former. In a crude analysis the personal financial situation index explains about 37 % of the variance in the growth rate of consumption. The index has an important significant effect even in the presence of other variables in the two types of consumption models that are considered, an Euler equation and a solved-out consumption model. In the latter model, the confidence index increases the explained part of the variance in consumption growth from about 0.69 to 0.76. The real after-tax interest rate and the change in the inflation rate are important determinants of consumption. Financial wealth is more important than housing wealth and changes in debt also influence consumption. The solved-out consumption model is able to reflect the Swedish boom-to-bust cycle in consumption remarkably well. JEL Classification: E21 Department of Economics and Department of Statistics, Box 513, S-751 20 Uppsala , Sweden. E-mail: [email protected] and [email protected].