Volatility in Panel Data of Household Expenditure
AbstractThe variance of growth rates of recall food expenditure is usually greater than the variance of the income growth rate. Many researchers regard the strong volatility as a symptom of measurement error. Comparing two data sets, diary data and recall data, I find that the measurement error cannot account for the observed large variance in the consumption data. Variance decomposition of the consumption and income growth rates reveals that the permanent component of the consumption variance is smaller than that of the income variance, suggesting that the consumption smoothing holds in the long run. Short run fluctuation in consumption, however, is not caused by measurement error. The implication of this finding for the modeling of household behavior is also discussed.
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Bibliographic InfoPaper provided by Institute of Economic Research, Hitotsubashi University in its series Hi-Stat Discussion Paper Series with number d07-237.
Date of creation: Feb 2008
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-02-16 (All new papers)
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