Engel's Law and Cointegration

Abstract

A time-series counterpart of Engel's law is that the expenditure share on food declines as the economy grows. The main purpose of this paper is to test whether Houthakker's addilog utility function can simultaneously explain this time-series observation and cross-sectional observations concerning Engel's law. Ogaki and Park's cointegration approach is used to estimate parameters of the utility function from time-series data. Total expenditure elasticities implied by the estimated addilog utility function are compared with estimates of the elasticities from cross-sectional data.