Consumer confidence, consumption, and macroeconomic fluctuations: A systemic stock-flow consistent model

Abstract

In the past 40 years, consumption and household debt have been the major factor lying behind aggregate fluctuations in economies. This study investigates if the psychological characteristics of households can drive these fluctuations and which policies can be effective in reducing their amplitude. To this end, we have built a system dynamics model based on the stock-flow consistent framework. Our main finding is that households' psychological characteristics are the primary determinant of the behavior and stability properties of income, consumption, and household debt. The government can apply countercyclical fiscal or countercyclical transfer policies to tame fluctuations in these variables.