Consumer confidence and consumption expenditure in Indonesia

We estimate several competing regressions and find that confidence predicts consumption expenditure in Indonesia. Our estimations employ data on two measures of confidence, namely consumer and business confidence indexes, consumption and three standard predictors of consumption, namely labour income, stock price,and interest rate. We show that there are economic and statistical gains from consumption growth frame works that account for consumer and business sentiments. Specifically, we show that policymakers can improve their forecast accuracy by between 4% and 13% by incorporating consumer and business sentiments into their fore-casting frameworks.