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Are Engel Curve Estimates of CPI Bias Biased?

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  • Trevon D. Logan

Abstract

A recent literature has advanced the use of Engel curves to estimate overall CPI bias. In this paper, I show that the methodology is sensitive to the modeling of household demography. Existing estimates of CPI bias do not account for the changing effect of household size on budget shares, and this can lead to omitted variable bias. Since the effect of household size on demand changes over time the drift in Engel curves attributed to CPI bias is partially explained by this effect. My estimates of the annual rate of CPI bias from 1888 to 1935 are changed by at least 25%, and usually more than 50%, once the changing effect of household size is accounted for.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13870.

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Date of creation: Mar 2008
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Handle: RePEc:nbr:nberwo:13870

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  1. Ingvild Almas, 2012. "International Income Inequality: Measuring PPP Bias by Estimating Engel Curves for Food," American Economic Review, American Economic Association, vol. 102(2), pages 1093-1117, April.
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  3. John Gibson & Steven Stillman & Trinh Le, 2004. "CPI Bias and Real Living Standards in Russia During the Transition," Working Papers in Economics 04/02, University of Waikato, Department of Economics.
  4. Li Gan & Victoria Vernon, 2003. "Testing the Barten Model of Economies of Scale in Household Consumption: Toward Resolving a Paradox of Deaton and Paxson," Journal of Political Economy, University of Chicago Press, vol. 111(6), pages 1361-1377, December.
  5. Timothy Beatty & Erling Røed Larsen, 2005. "Using Engel curves to estimate bias in the Canadian CPI as a cost of living index," Canadian Journal of Economics, Canadian Economics Association, vol. 38(2), pages 482-499, May.
  6. Erling Røed Larsen, 2007. "Does the CPI Mirror the Cost of Living? Engel's Law Suggests Not in Norway," Scandinavian Journal of Economics, Wiley Blackwell, vol. 109(1), pages 177-195, 03.
  7. Pollak, Robert A & Wales, Terence J, 1979. "Welfare Comparisons and Equivalence Scales," American Economic Review, American Economic Association, vol. 69(2), pages 216-21, May.
  8. Jerry Hausman, 2003. "Sources of Bias and Solutions to Bias in the Consumer Price Index," Journal of Economic Perspectives, American Economic Association, vol. 17(1), pages 23-44, Winter.
  9. Irineu E. Carvalho Filho & Marcos Chamon, 2006. "The Myth of Post-Reform Income Stagnation in Brazil," IMF Working Papers 06/275, International Monetary Fund.
  10. Richard Blundell & Martin Browning & Ian Crawford, 1997. "Non-parametric Engel curves and revealed preferences," IFS Working Papers W97/14, Institute for Fiscal Studies.
  11. Trevon D. Logan, 2008. "Economies of Scale in the Household: Puzzles and Patterns from the American Past," NBER Working Papers 13869, National Bureau of Economic Research, Inc.
  12. Angus Deaton & Christina Paxson, 1998. "Economies of Scale, Household Size, and the Demand for Food," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 897-930, October.
  13. Robert A. Pollak, 1998. "The Consumer Price Index: A Research Agenda and Three Proposals," Journal of Economic Perspectives, American Economic Association, vol. 12(1), pages 69-78, Winter.
  14. Dora L. Costa, 1999. "American Living Standards: Evidence from Recreational Expenditures," NBER Working Papers 7148, National Bureau of Economic Research, Inc.
  15. Pollak, Robert A, 1980. "Group Cost-of-Living Indexes," American Economic Review, American Economic Association, vol. 70(2), pages 273-78, May.
  16. Bruce W. Hamilton, 2001. "Using Engel's Law to Estimate CPI Bias," American Economic Review, American Economic Association, vol. 91(3), pages 619-630, June.
  17. Pollak, Robert A & Wales, Terence J, 1980. "Comparison of the Quadratic Expenditure System and Translog Demand Systems with Alternative Specifications of Demographic Effects," Econometrica, Econometric Society, vol. 48(3), pages 595-612, April.
  18. Lewbel, Arthur, 1985. "A Unified Approach to Incorporating Demographic or Other Effects into Demand Systems," Review of Economic Studies, Wiley Blackwell, vol. 52(1), pages 1-18, January.
  19. Nelson, Julie A, 1988. "Household Economies of Scale in Consumption: Theory and Evidence," Econometrica, Econometric Society, vol. 56(6), pages 1301-14, November.
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Cited by:
  1. de Carvalho Filho, Irineu & Chamon, Marcos, 2011. "The myth of post-reform income stagnation: Evidence from Brazil and Mexico," MPRA Paper 28532, University Library of Munich, Germany.

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