Erling Røed Larsen

Does the CPI Mirror the Cost of Living? Engel's Law Suggests Not in Norway

There is considerable interest in identifying the magnitude of the difference between increases in CPI and costs-of-living, and this article uses the technique proposed by Hamilton (2001) to measure this discrepancy for Norway for the 90s. The method is extended along several dimensions by introducing a framework in which measurement errors are modelled. A non-parametric approach is then employed to segment households into demographic types while allowing for flexibility in costs-of-living increases for different standards. Hamilton finds that American CPI overstates costs-of-living in the U.S. for the period 1974-1991, Norwegian results for 1990-1999 indicate that CPI sometimes may understate costs-of-living, perhaps because of a credit-financed boom in house prices. The Norwegian CPI rose 22 percent in the period, but the general consumer behaved as if costs-of-living increased more than 35 percent. For some segments of society, for example single-person households, the increase was substantially larger, suggesting potentially important distributional effects.

Distributional effects of environmental taxes on transportation. Evidence from engel curves in the United States

Indirect taxes on transportation activities that pollute can correct externalities and close the gaps between private and social costs. However, policy makers often find such Pigou taxes difficult to implement because of political resistance due to possibly adverse affects on equity. For this reason it is important to assess the distributional aspects of environmental levies. This article estimates properties of the demand for transportation in parametric and non-parametric analyses of Consumer Expenditure Surveys for the United States and finds patterns in the resulting set of Engel curves. Private transportation using air flights and new cars has Engel elasticity above unity while public transportation via mass transit has Engel elasticity below unity. The findings can be interpreted in an important way since they show that a differentiated scheme of environmental taxes on transportation may function progressively. A Pigou scheme with larger taxes on modes of transportation that pollute more appears to coincide with larger levies on luxury modes preferred by richer households.

Rising inequality of housing? : evidence from segmented housing price indices

This article uses the Case‐Shiller technique for constructing house price indices on a Norwegian data set of transactions for the period 1991–2002 comprising 10,376 pairs of repeated sales. Using weighted least squares to control for heteroskedasticity, we construct a general house price index by regressing differences in log prices for the subset of repeated sales of identical homes onto a set of dummy time variables, one for each quarter in the period studied. The index thus constructed shows that, in general, nominal prices for identical homes have increased by a factor of 3.58 over the 11‐year period, while the consumer price index increased by 1.28, creating substantial capital returns for early purchasers. Considerable differences were also found in the appreciation in submarkets defined by dwelling size. This article argues that asset appreciation and differences in asset appreciation have important policy ramifications and represent challenges for policymakers and the general populace.

Distributional Effects of Environmental Taxes on Transportation

This article deals with environmental and distributional effects from a differentiated tax system on a set of disaggregated transportation goods. Empirical examination of Norwegian data indicates that higher tax rates on high-pollution luxury modes of transportation such as air flights and taxis reduce inequality and increase environmental quality. Lower tax rates on low-pollution necessities such as buses, bicycles, and mopeds reduce inequality and increase environmental quality. Higher taxesor high-pollution necessities such as gasoline have favourableenvironmental effects, but increase inequality somewhat. Railway passenger transportation appears to be distributionally neutral. In order to interpret the estimates with respect to distributional and environmental concerns, use is made of a theory of distribution effects based on Engel, child, and adult elastricities and a wide range of empirical estimates of environmental hazards from transportation consumption. For different modes of transportation, an analysis is made of emissions per passenger-kilometer and per monetary unit.

Driven to drink: Sin taxes near a border

This paper investigates household purchasing behavior in response to differing alcohol and tobacco taxes near an international border. Our study suggests that large tax differentials near borders induce economically important tax avoidance behavior, which may limit a governments ability to raise revenue and potentially undermine important health and social policy goals. We match novel supermarket scanner and consumer expenditure data to measure the size and scope of the effect for households and stores. We find that stores near/far from the international border have statistically significantly lower/higher sales of beer and tobacco than comparable stores far/near the border. Moreover, we find that households near the border report higher consumption of these same goods. This is consistent with households facing lower prices. Finally, we find measures of externalities associated with these goods are higher near the border.

Thick‐Market Effects, Housing Heterogeneity, and the Determinants of Transaction Seasonality

This article uses cross‐sectional variation in transaction seasonality and a search‐theoretic framework to develop a test for thick‐market effects from matching efficiency. The test relates the extent of transaction seasonality to the degree of horizontal housing heterogeneity. We find a strong positive association between measures of seasonality and housing heterogeneity using a transaction level dataset for Norway, which is consistent with the presence of thick‐market effects. These results also show that the degree of horizontal heterogeneity of the housing stock is an important determinant of the extent of seasonality in a housing market.

Strategic sequencing behavior among owner-occupiers: The role played by sell-first movers in a housing recovery

Purpose – This article aims to study the dual search problem using data on the Norwegian housing market during the financial crisis of 2008 and begin the detailed mapping of the elements in the transmission mechanism from policy to the housing market. Moving owner occupiers face a simultaneous dual search and matching problem, as they must locate both a buyer and a seller with whom to transact. Individual agents solve this optimization under uncertainty by planning to make their bids for a new house partially conditional upon the sale of the old house. Design/methodology/approach – Norway may function as a window into a policy quasi-laboratory since the housing market was turned around in December 2008 in the midst of a worldwide financial crisis and after a year and a half of price decreases. The article proposes that one key dimension in the recovery was the reduced frequency of households with conditional demand involving sell-first strategies and acquires data to shed light on this proposition. Findin...

What May Eventually Limit Rising House Prices? Evidence from Engel Elasticities and Budget Shares of Housing

Rising house prices lead to questions of sustainability, since mortgages must be financed from future incomes. Much attention is thus focused on the relationship between housing expenditure and income. This article estimates Engel elasticities of housing expenditure for each independent cross‐section of the Norwegian Consumer Expenditure Surveys in the period 1986–98, and finds that the elasticity remains surprisingly close to unity for all years. Its mean over the period is 1.02. This indicates that when incomes or total consumption increase by 1%, then housing expenditure also increases 1%. Engel and demographic effects are estimated in an errors‐in‐variables two‐stage‐least‐square regression model using random samples. This article documents that, given demographic composition, a households demand for housing seems to increase proportionately with total consumption, in contrast to categories such as food and transportation. This empirical regularity appears to be quite resilient towards changes in business cycles, relative prices and other time‐dependent changes. It may represent a basic pattern of consumption, and thus yield forecasting potential and herald the possibility of estimating ceilings to housing expenditure. If the elasticity continues to be unity, then over a period of time future housing expenditures will keep the same pace as incomes.

THE ENGEL CURVE OF OWNER-OCCUPIED HOUSING CONSUMPTION

Housing is a major component of aggregate demand, and understanding how the demand for housing co-varies with income is useful for analysis and policy. While estimating housing consumption for tenants amounts to observing rents, estimating housing consumption for owner-occupiers is challenging because it is not directly observable and interest payments vary with re-paid principals. In order to examine the housing consumption for owner- occupiers, this article combines micro data sets on income and imputed rents for owner- occupiers based on home attributes from a consumer expenditure survey and monthly rents in a rental survey. This allows estimation of an Engel curve of owner-occupied consumption, both parametrically and non-parametrically. Regression results demonstrate that the income share of owner-occupied housing consumption decreases with income, while the Engel elasticity computed at the mean is 0.32 and increasing in income.

TESTING FOR MICRO-EFFICIENCY IN THE HOUSING MARKET: TESTING FOR MICRO-EFFICIENCY IN THE HOUSING MARKET

While aggregate house price indices display time persistence, less is known about micro persistence. This article proposes that absence of micro persistence implies that an excessively high or low sell price in one transaction is not repeated in the next transaction. We exploit a unique Norwegian data set of publically registered housing transactions between 2002 and 2014 and follow housing units over time to see if excessive prices persist or revert. In a regression with time and unit-fixed effects of sell-price-to-predicted-price ratios on previous sell-price-to-predicted-price ratios, we reject persistence and find substantial reversion. We also test for possible arbitrage opportunities in the form of excess returns. Once we control for price increases that are due to home improvements, we document that there is little scope for profitable arbitrage in excess of the market return. The overall impression is that the Norwegian housing market is relatively micro efficient.