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This paper uses data from the Korean Labor and Income Panel Study (KLIPS) to examine whether measurement error in income and consumption has the potential to generate biases for studies on income and consumption dynamics. A first-differenced dynamic panel model is estimated with lagged income and consumption as internal instruments and the household head's satisfaction with their household income as an external instrument. This study suggests that there is substantial time-varying measurement error in reported income and consumption, leading to a bias towards zero in the estimates of income and consumption dynamics. Time-invariant measurement error and unobserved heterogeneity are also found to be important and to lead to upward biases in the estimated coefficients, offsetting the effect of time-varying measurement error. The standard deviation of time-varying measurement error is as large as the standard deviation of the equation error for both income and consumption dynamics. This result also supports the view that time-varying measurement error exists in reported income and consumption and has a substantial magnitude.