Does uncertainty matter for household consumption? A mean and a two tails approach

Abstract

This paper expands on the existing literature regarding the relationship between uncertainty and private consumption expenditure, focusing on a panel of 14-euro area countries from 1997 to 2021. By focusing on household spending choices and using a quantile approach alongside accounting for cross-country heterogeneity, we provide novel perspectives on how uncertainty influences household consumption behavior. We assess uncertainty through a combination of composite, economic, and financial risk indices. Additionally, we examine the effect of uncertainty on household consumption across its conditional distribution. Empirical results confirm that uncertainty influences consumption expenditures and reveal a significant relationship between uncertainty and consumption along the conditional consumption distribution. Notably, this effect is stronger at the lower quantiles of the consumption distribution, highlighting asymmetries in the relationship. Our analysis emphasizes the critical role of uncertainty in understanding and explaining household consumption behavior.