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Volatility in Panel Data of Household Expenditure

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  • Naohito Abe

Abstract

The 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.

Suggested Citation

  • Naohito Abe, 2008. "Volatility in Panel Data of Household Expenditure," Hi-Stat Discussion Paper Series d07-237, Institute of Economic Research, Hitotsubashi University.
  • Handle: RePEc:hst:hstdps:d07-237
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    File URL: http://hi-stat.ier.hit-u.ac.jp/research/discussion/2007/pdf/D07-237.pdf
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    Cited by:

    1. Chiwaula, Levison & Waibel, Hermann, 2011. "Seasonal bias in household vulnerability to poverty stimates: insights from a natural experiment," MPRA Paper 30716, University Library of Munich, Germany.

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