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Ability to consume versus willingness to consume: the role of nonlinearities

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  • Petar Sorić

    (University of Zagreb)

Abstract

Following the tradition of George Katona, this study utilizes consumer surveys to extract indicators of ability to consume and willingness to consume for 28 European economies. A function of durables consumption is specified, acknowledging the potentially important role of nonlinearities, which have insofar been neglected in the literature. The estimated state space models reveal that the effects of both stated subjective concepts exhibit considerable time-variability. Their impact seems to be heavily dependent on the business cycle, with an intensification of the observed relationship during recessions. Further on, nonlinear autoregressive distributed lag modelling indicates significant asymmetries in the impact of ability to consume: household expenditure generally reacts more strongly to negative than to positive changes of the stated variable. To that end, the presented specifications corroborate the main postulate of prospect theory. On the other hand, willingness to consume does not exhibit such pronounced asymmetry. Finally, the detected nonlinearities are exclusively transitory, reaffirming animal spirits as a short-run predictor of economic behavior.

Suggested Citation

  • Petar Sorić, 2022. "Ability to consume versus willingness to consume: the role of nonlinearities," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 49(3), pages 663-689, August.
    • Handle: RePEc:kap:empiri:v:49:y:2022:i:3:d:10.1007_s10663-022-09535-y
    DOI: 10.1007/s10663-022-09535-y
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    Keywords

    Ability to consume; Willingness to consume; Personal consumption; Time-varying parameters; Nonlinear autoregressive distributed lag model;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E71 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on the Macro Economy

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