Consumption Volatility, Marketization, and Expenditure in an Emerging Market Economy

In response to income fluctuations, households smooth consumption by substituting between market expenditure and time inputs. This paper provides evidence of this substitution in the context of food consumption over transitory and permanent income fluctuations in Mexico. Household time investments drive a wedge between consumption and expenditure, amplifying measured expenditure volatility. Volatility decompositions for Mexico and the United States suggest that the extent of bias in expenditure-based measures induced by changes in marketization is relatively larger in the Mexican setting. These findings imply that volatility comparisons between commodities or across countries are misleading when consumption measures ignore home production. (JEL D12, D91, E21, E32, O11, O12)