Ability to consume versus willingness to consume: the role of nonlinearities

Following the tradition of George Katona, this study utilizes consumer surveys to extract indicators of ability to consume and willingness to consume for 28 European economies. A function of durables consumption is specified, acknowledging the potentially important role of nonlinearities, which have insofar been neglected in the literature. The estimated state space models reveal that the effects of both stated subjective concepts exhibit considerable time-variability. Their impact seems to be heavily dependent on the business cycle, with an intensification of the observed relationship during recessions. Further on, nonlinear autoregressive distributed lag modelling indicates significant asymmetries in the impact of ability to consume : household expenditure generally reacts more strongly to negative than to positive changes of the stated variable. To that end, the presented specifications corroborate the main postulate of prospect theory. On the other hand, willingness to consume does not exhibit such pronounced asymmetry. Finally, the detected nonlinearities are exclusively transitory, reaffirming animal spirits as a short-run predictor of economic behavior.