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.

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.

As pointed out by Hall (1988), intertemporal substitution by consumers is a central element of many modern macroeconomic and international models. We argue that Hall's estimator or the IES is downward biased because the intra-temporal substitution between nondurable consumption goods and durable consumption goods is ignored and because the changes in real interest rates affect user costs of durable goods.