Graduation Year

2015

Date of Submission

4-2015

Document Type

Campus Only Senior Thesis

Degree Name

Bachelor of Arts

Department

Economics

Reader 1

Manfred Werner Keil

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Rights Information

© 2015 Vicky (Mengyue) Yang

Abstract

Using data from the Michigan Consumer Survey, I explore alternatives for constructing the Index of Consumer Sentiment (ICS) to improve its forecasting power regarding consumption and its components. Questions which seemed to matter in the past are no longer good predictors. For more recent sample periods, expectations of automobile purchases, unemployment, and current economic situations are more important than categories selected previously. An alternative index is constructed accordingly. Applying different techniques suggested in the literature, the new index significantly outperforms the ICS in both in-sample and out-of-sample tests. Furthermore, the new index also produces more accurate results when forecasting recessions.

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