Are the responses to survey questions on well-being dynamically consistent? Vector ARMA modelling in a short panel with ordinal observation

Abstract

We develop a simulated ML estimator for a system of ARMA linear
equations in a short panel, where the dependent variables are partially observed
through ordinal scales. This is used to model households’ perceptions of financial
well-being and test the hypothesis that their answers to two questions in the British
Household Panel Survey about current and past financial well-being are consistent
with each other and with the existence of a common underlying well-being concept.
We find that current perceptions exhibit slow adjustment to changing circumstances
and that comparisons of current and retrospective perceptions are contaminated by
temporal adjustment of perceptions.