RESEARCH ON THE NORWEGIAN CONSUMPTION FUNCTION: Consumer Confidence

Abstract

This paper examines the link between consumer confidence and consumption expenditures in Norway. We first tested the predictive ability of consumer confidence in a linear regression with macroeconomic fundamentals as controls. The model shows how confidence brings additional information to explain consumption growth beyond fundamentals. Inclusion of consumer confidence for the EU in the model reveals a possible confidence channel from the EU to Norway. The relationship between the Norwegian consumer confidence and Norwegian fundamentals is investigated further through vector autoregressions (VAR). Impulse response functions reveal an increased consumption response to confidence shocks in times of uncertainty. Consumers seem to maintain a long memory of the impact of confidence during these uncertain times relative to regular times. We also discovered the increasing importance of confidence shock during the last three decades. Our findings suggest that consumer confidence should be included when assessing consumption growth.