DOES AIR POLLUTION IMPACT CONSUMER SENTIMENT IN PAKISTAN: A CITY-LEVEL ANALYSIS

Abstract

Air pollution is a rising concern in Pakistan for the past few years. Apart from a direct bearing on the health of households, and a significant risk to the environment; it is hypothesized that poor air quality has an impact on consumer sentiment in major cities of Pakistan. In this study, the impact of air quality on consumer sentiment is estimated for major cities of Pakistan. Consumer confidence survey conducted by the State Bank of Pakistan is one of the leading indicators of economic activity. This survey primarily reflects consumers’ perceptions about the current and expected economic conditions. Consumer sentiment is measured by the Diffusion Index, while the Air Quality Index is used to capture the magnitude of air pollution. Using city fixed effects model on balanced panel data of ten cities and 36 time periods, results show air pollution has a negative impact on consumer sentiment in Pakistan. The coefficient of air pollution is statistically significant and is consistent in all specifications – reflecting that air pollution does impact consumer sentiment. Reverse causality test validates that consumer sentiment do not impact air pollution. Control variables such as dummies for floods, terrorist attacks, and household characteristics for each city are included in this study to gain improved model fit. The government of Pakistan needs to acknowledge the severity of air pollution and its impact on consumer sentiment – a leading indicator of economic activity.

Keywords

• air pollution
• consumer sentiment
• diffusion index
• balanced panel
• environment

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