Pınar DENİZ

Consumer Confidence in Dynamic Stochastic General Equilibrium Model

2014

(Supervisor: Erhan Aslanoğlu)

ABSTRACT

Understanding the decision-making processes of the agents is essential to model their objective functions which enables economic researchers to construct theories under optimal conditions. Economics, as a social science, is based on many assumptions regarding agents and the market system. However, some assumptions become restrictive and unrealistic rather than simplifying if real life is taken into account which render the analyses questionable. Likewise, rationality and perfect utility maximization assumptions for consumers sound unrealistic, considering the impact of non-economic motives on consumption decisions. Concentration on the behaviors of the agents under a recently developed study field, i.e., behavioral economics, highlights the importance of behaviors on economics. This study is a modest attempt to incorporate the mood of the agents into the production function under the argument that producers –especially small and medium scale enterprises which are highly dependent on demand, thus predicting demand is of utmost importance in order to survive in the highly competitive market conditions- perceive consumption decisions through their “animal spirits”. In other words, mood of the consumers is used as a proxy for animal spirits, i.e., the production decision of the firms.

Empirical findings (structural VAR) suggest that “the mood” provides predictions about the economy and that consumer confidence shock has a significant positive impact on the level of production. Based on the empirical findings, the transmission is modelled under a new Keynesian DSGE model. The study assumes that non-economic consumer behavior can be proxied by the residual of consumer confidence index (CCI) after explaining it by relevant economic indicators. The dataset employed is of monthly period over 2006-2012 for Turkish economy. Bayesian impulse response functions also suggest that mood (confidence) shock has a positive impact on the level of production.