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The Rank of a System of Engel Curves. How Many Common Factors?

Author

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  • Matteo Barigozzi
  • Alessio Moneta

Abstract

By representing a system of budget shares as an approximate factor model we determine its rank, i.e. the number of common functional forms, or factors, spanning the space of Engel curves. Once the common factors are estimated via approximate principal components, we identify them by imposing statistical independence. Finally, by means of parametric and non-parametric regressions we estimate the factors as functions of total expenditure. Using data from the U.K. Consumption Expenditure Survey from 1968 to 2006, we find evidence of three common functional forms which correspond to decreasing, increasing and almost constant Engel curves. The household consumption behavior is therefore driven by three factors respectively related to necessities (e.g. food), luxuries (e.g. vehicles), and goods to which is allocated the same percentage of total budget both in rich and in poor households (e.g. housing).

Suggested Citation

  • Matteo Barigozzi & Alessio Moneta, 2011. "The Rank of a System of Engel Curves. How Many Common Factors?," Papers on Economics and Evolution 2011-01, Philipps University Marburg, Department of Geography.
    • Handle: RePEc:esi:evopap:2011-01
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    Cited by:

    1. Andreas Chai, 2017. "Tackling Keynes’ question: a look back on 15 years of Learning To Consume," Journal of Evolutionary Economics, Springer, vol. 27(2), pages 251-271, April.

    More about this item

    Keywords

    Engel Curves; Demand Systems; Factor Models; Independent Component Analysis Length 29 pages;
    All these keywords.

    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis

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