Test For Aggregation Bias On The United States Personal Consumption Expenditure

1188 Words Nov 28th, 2014 5 Pages
The purpose of this analysis is to test for aggregation bias in the United States Personal Consumption Expenditure (PCE). This paper uses first and second generation panel unit root testsfootnote{For more information see Hurlin (2007). } on the National Income and Product Accounts (NIPA) that make up the PCE. Second generation tests differ from first generation tests in that the latter drop the assumption of cross sectional independence the error term. Aggregation bias exists if NIPA inflation differentials converge or diverge at different levels of aggregation. An inflation differential is the difference between inflation rates in one sector and the inflation rate in another sector. Higher levels of aggregation are made to represent the lower, more dis-aggregate levels. If aggregates properly represent the underlying data then each level should converge or diverge the same. Aggregation is important because the process used to aggregate the data may remove information from the data and create divergent inflation differentials when dis-aggregate inflation rates converge. Monetary policy of the Federal Open Market Committee (FOMC) is based on a target inflation rate, however there are concerns that if the FOMC focus 's on aggregate inflation it may cause individual sectors to diverge. Clark (2006) uses dis-aggregate quarterly NIPA accounts to study the distribution of inflation persistence across consumption sectors. Inflation persistence is the tendency of inflation to…
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