Economic Policy Uncertainty and consumer sentiment: Insights from different age demographics

Abstract

This study investigates the influence of Economic Policy Uncertainty (EPU) and four other macroeconomic variables on consumer sentiment across three different age groups in the United States from 1985 to 2023. The study is conducted by using a Vector Autoregression (VAR) model and Granger causality test. The research explores the dynamics between EPU, Industrial Production Index, Consumer Price Index, and unemployment rate and their effects on consumer sentiment among three age groups, 18-34, 35-54, and 55+. The dynamics between variables are examined as a group and individually.

The results reveal that EPU significantly impacts consumer sentiment across all age groups, with young adults showing the most immediate reactions. Middle-aged consumers exhibit substantial sensitivity to EPU, while older adults demonstrate a more persistent but less intense response. Additionally, other economic variables such as CPI, IPI, and the unemployment rate also significantly affect consumer sentiment, with varying impacts across age groups. Additionally, impulse response functions indicate that younger adults are more negatively affected by inflation, while industrial production boosts sentiment across all groups. The Granger causality tests confirm that EPU precedes changes in consumer sen-timent, emphasizing its role as a leading indicator.