Sentiment indexes, which are constructed from answers to survey questions, are popular with the media; newspaper articles and commentaries abound following their release.
Few studies have found that sentiment indexes have significant explanatory power once fundamental economic factors are taken into account.
In this section, we summarize the empirical literature on the use of consumer sentiment indexes in a consumption function.
The inclusion of such variables in a consumption equation will ensure that the addition of sentiment indexes provides further explanatory power only to the extent that the indexes capture information relative to expected income, uncertainty, or at least information not found in standard macroeconomic data.
The findings in the empirical literature on consumer sentiment indexes can be divided into three groups.
The second group includes studies finding that sentiment indexes have an incremental explanatory value.
The third group of studies finds that sentiment indexes are useful because they improve forecasts of consumption during exceptional periods.
Some researchers, however, have suggested that sentiment indexes could be helpful during major economic or political events, as they tend to diverge from a path consistent with other macroeconomic variables in such periods.