Animal Spirits and Household Spending in Europe and the US

Abstract

We investigate whether consumer confidence has an independent effect on household spending. First, we control for a common set of factors that drive both consumer confidence and household spending. Next, we interpret the non-systematic residuals in the country consumer confidence equations as a proxy for animal spirits, "a spontaneous urge to action rather than inaction" in Keynes' words, and subsequently include this proxy in the spending equations as an additional explanatory variable. Our results suggest that animal spirits exist and may have a considerable impact on spending growth in Europe and the US.