Aggregation in the presence of data processing lags distorts the information content of data, violating orthogonality restrictions that hold at the individual level. Though the phenomenon is general, it is illustrated here for the life cycle-permanent model. Cross-section and pooled-panel data induce information-aggregation bias akin to that in aggregate time series. Calculations show that information-aggregation can seriously bias tests of the life cycle model on aggregate time series, cross-section, and pooled-panel data.
Our Research Focus: Economic Growth and Business Cycles