23In exercises of this kind, the proportion of household-level consumption expenditures that can be explained by observable variables like the household’s demographic characteristics and other standard Xh,t  variables is modest – the R2  in regressions of the form of (1) is typically far below 0.5, indicating that households’ choices are determined much less by observable than by unobservable characteristics (a leading candidate for such an unobservable characteristic is of course permanent income).