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An Analysis of Consumer Expectation Effects on Demand in a Dynamic Almost Ideal Demand System
Journal article   Peer reviewed

An Analysis of Consumer Expectation Effects on Demand in a Dynamic Almost Ideal Demand System

Paul Taube, William Huth and Don MacDonald
Journal of economics and business, Vol.42(3), pp.225-236
08/01/1990
DOI: https://doi.org/10.1016/0148-6195(90)90048-H
Web of Science ID: WOS:A1990DR85400005

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Abstract

A theoretical framework is presented for analyzing psychological, perceptual, or expectational effects on household expenditure within a complete demand system that also is consistent with household utility-maximizing behavior. The framework was developed by extending Deaton and Muellbauer's (1980) Amost Ideal Demand System model to incorporate consumer expectation effects in a manner analogous to that of Barton (1964). The proposed model was estimated with the Consumer Sentiment Index (CSI), which represents an index of consumer perceptions of future economic conditions, and was reestimated separately for 3 CSI components: 1. the business conditions index, 2. the expected financial condition index, and 3. the buying conditions index. The CSI was found to be significant for the following expenditure categories: 1. alcohol, 2. housing services, 3. durable goods, and 4. other services. The results demonstrate the model's potential usefulness for both demand forecasting and policy analysis.

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