2012/16  LEM Working Paper Series  
Identifying the Independent Sources of Consumption Variation 

Matteo Barigozzi, Alessio Moneta 

Keywords  
Budget Shares, Engel Curves, Approximate Factor Models, Independent Component Analysis, Local Linear Regression


JEL Classifications  
C52, D12


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 and we estimate a base of the factor space by means
of approximate principal components. We assume that the extracted
factors span the same space of basic Engel curves representing the
fundamental forces driving consumers' behaviour. We identify and
estimate these curves by imposing statistical independence and by
studying their dependence on total expenditure using local linear
regressions. We prove consistency of the estimates. Using data from
the U.K. Family Expenditure Survey from 1968 to 2006, we find evidence
of three common factors which are identified as decreasing, increasing
and almost constant Engel curves. The household consumption behaviour
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 by rich and poor
households (e.g. housing).
 
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