Good confidence, good trade: The heterogeneous impacts of consumer expectations on trade flows

In this paper, we analyze the empirical relationship between consumer expectations and international trade, an unexplored link in the literature. We estimate an augmented gravity model to assess how consumer confidence index (CCI) levels impacts bilateral trade flows across 61 economies from 2011 to 2021. Our results show that country pairs with higher consumer expectations trade more with each other than those with lower expectations. A one-standard-deviation (SD) increase in joint consumer confidence for a given country pair leads to a 3.3% rise in bilateral trade. We also find evidence of heterogenous impacts of consumer expectations on export supply and import demand. A one-SD increase in the CCI of an economy raises its exports, on average, by 2.5%, while imports grow by 4.0% with a similar rise in confidence. Finally, we find that the effect of CCI varies depending on the income level of trade partners, and that expectations play a more significant role in predicting bilateral trade flows of manufactured goods than agricultural products