Political events and consumer confidence in Belgium

Abstract

The paper investigates the impact of political events on consumer confidence. In doing so, we distinguish between the announcement of elections, the election results and government changes. We argue that such political events alter the expectations of consumers on future policies. In a two-party political system, election results lead straightforwardly to a new government so a government formation will not be of interest to consumers. In a multiparty political system, however, the government will usually be made up of several parties; i.e., be a coalition government. The election results do not, therefore, resolve the policy uncertainty. Hence, a government formation contains important information about future policies. We test the theory on Belgian consumer confidence data. The results suggest that unexpected elections and new governments affect consumer confidence; ideology is not important. In the tests we control for the effects of economic variables. These results imply that political events by themselves can indeed affect economic variables. Caution is therefore required when interpreting tests of political business cycles.