Consumer Confidence and Stock Prices in the Euro Area: Is There a Relationship - and Does it Matter?

Abstract

This study uses VAR analysis to assess the linkage between stock market developments and consumer confidence in the euro area. The empirical evidence suggests the existence of a significant positive relationship between stock market developments and consumer confidence in the euro area. As statistical causality seems to mainly run from stock prices to consumer sentiment, it is justified to qualify this empirical regularity as a confidence effect of stock markets. Such confidence effect proved to be robust against inclusion of several control variables in the VAR. However, a VAR that also includes real consumption growth suggests that the movements in confidence that stem from stock market shocks tend to be unrelated to future actual consumption. Moreover, there is only limited evidence that innovations in confidence can matter for consumption even after controlling for income effects and labour market uncertainty, leaving open the question whether households‘ consumption decisions are partly governed by something like animal spirits.