Differences in Expectation Formation of Consumers in Emerging and Industrialized Markets

The consumer confidence/sentiment indices are measured in many developed and developing countries. However, the vast literature on consumer confidence focus on the behavior of the indices for developed economies. These indices are often considered to have predictive power on future economic activity as Fair (1971), Carroll et al. (1994), Howrey (2001), Golinelli and Parigi (2003) and Ludvigson (2004) show. This paper examines whether there are any differences in expectation formation of consumers in developed and developing economies through consumer confidence measures. Our data set is constrained between 2002 January – 2009 November for a balanced panel analysis. In emerging countries, where income per capita is close to the level of subsistence, the expectations of consumers fail to generate any feedback from confidence into economic activity. However, as households save more with rising levels of income, we observe the influence of expectations on consumption. Hence, there are differences even within developing economies in terms of household expectation formation which could lead to significant departures from the well-known theoretical foundations for consumer confidence.