PREDICTION AND DETERMINATION OF HOUSEHOLD PERMANENT INCOME.pdfVIP

PREDICTION AND DETERMINATION OF * HOUSEHOLD PERMANENT INCOME Ramses H Abul Naga University of Lausanne and Robin Burgess London School of Economics and Political Science The Toyota Centre Suntory and Toyota International Centres for Economics and Related Disciplines London School of Economics and Political Science Discussion Paper Houghton Street No. DARP/32 London WC2A 2AE November 1997 Tel.: 020-7955 6678 * We are grateful to seminar participants at the University of Geneva, London School of Economics, University of Lausanne, University of Namur, Stanford University, University College London, and to Christian Schlüter, Marcel Fafchamps, Arthur Goldberger, Alberto Holly and John Muellbauer for useful comments and suggestions. Abstract This paper is about the determination and prediction of permanent income in household data. Standard static welfare indicators (e.g. per capita expenditure and income) are imperfect in this respect as they typically contain a high transitory component. The framework we employ is consistent with the permanent income hypothesis but is supplemented with a causes equation where unobservable permanent income is explicitly modelled as a function of causal variables which play a key