Is Food Consumption a Good Proxy for Nondurable Consumption?

Abstract

This paper analyses the differences between food and nondurable consumption data. Due to the lack of annual panel data on households' nondurable consumption, many empirical studies that test for the permanent income hypothesis, consumption insurance hypothesis, or to estimate the elasticity of intertemporal substitution (EIS) use panel data on food consumption (from the Panel Study of Income Dynamics- PSID) as a substitution for nondurable consumption. In this paper, our main interest is to examine whether there is a discrepancy in estimating the EIS when we use food consumption instead nondurable consumption data for households with different wealth levels. The results show that there is a discrepancy on estimating the EIS and it increases as nondurable consumption increases.

Keywords: consumption growth, food consumption, separability

JEL Classification: D91, C12