The role of consumer sentiment in the transmission of monetary policy to consumer expenditure

Abstract

This paper shows that changes in consumer sentiment play a quantitatively important role in the transmission of monetary policy on economic activity. Specifically, the paper's empirical estimates indicate that changes in short-term consumer sentiment may very well double the negative responses of consumer expenditure to contractionary monetary policy shocks. In contrast, long-term consumer sentiment plays only a minimal role in the propagation of monetary policy shocks into consumer expenditure.