Stuck in the Seventies: Gas Prices and Consumer Sentiment

38 Pages Posted: 26 Oct 2018 Last revised: 28 Jan 2020

See all articles by Carola Binder

Carola Binder

Haverford College - Department of Economics

Christos Makridis

Stanford University; Arizona State University (ASU); Massachusetts Institute of Technology (MIT) - Sloan School of Management; Department of Veterans Affairs (VA)

Date Written: May 20, 2019

Abstract

Using daily consumer survey data, we analyze the transmission of gas prices to consumer beliefs and expectations about the economy. We exploit the high frequency and geographic disaggregation of our dataset to facilitate identification. Consumer sentiment becomes more pessimistic with rising gas prices. This effect is strongest for consumers who lived through the recessionary oil crises in the 1970s, consistent with models of learning from personal experience. For younger respondents, the sensitivity of sentiment to gas prices is stronger for college-educated respondents. Our results also provide an additional amplification mechanism for the macroeconomic effects of energy price changes.

Keywords: Consumer sentiment, macroeconomic expectations, selective attention, gas prices, behavioral macroeconomics

JEL Classification: E21, E32, E71, D12, D83, D84

Suggested Citation

Binder, Carola and Makridis, Christos, Stuck in the Seventies: Gas Prices and Consumer Sentiment (May 20, 2019). Available at SSRN: https://ssrn.com/abstract=3267721 or http://dx.doi.org/10.2139/ssrn.3267721

Carola Binder

Haverford College - Department of Economics ( email )

Haverford, PA 19041
United States

Christos Makridis (Contact Author)

Stanford University ( email )

Stanford, CA 94305
United States

Arizona State University (ASU) ( email )

Farmer Building 440G PO Box 872011
Tempe, AZ 85287
United States

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

Department of Veterans Affairs (VA) ( email )

810 Vermont Avenue NW
Washington, DC 20420
United States

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