Does sentiment explain consumption?

This paper examines whether "consumer sentiment," an often neglected variable, explains consumption expenditures for Australia. Since household consumption accounts for more than 60 percent of U.S. GDP and a similar proportion in other developed economies, fluctuations in consumption may result in significant changes in the state of the economy. Therefore, we develop a theoretical model that suggests why consumer sentiment may influence consumption expenditures. Furthermore, using a carefully specified consumption function as the "test-bed," we consider empirically whether there is an independent impact of sentiment on consumption. Our results suggest that consumer sentiment does influence variations in consumption expenditure.