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The cross-Euler equation approach to intertemporal substitution in import demand

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  • Shin-Ichi Nishiyama

    (Institute for Monetary and Economic Studies, Bank of Japan, Chuo-ku, Tokyo, Japan)

Abstract

This paper addresses the empirical dilemma in identifying and estimating the parameters governing the intertemporal elasticity of substitution (IES) for import demand. We propose a new concept, the cross-Euler equation, for overcoming this empirical dilemma. IES parameters are estimated by exploiting the cointegrating restriction implied by the cross-Euler equation. Further, by comparing the IES estimates from the cross-Euler equation to those from the standard Euler equation, we test the hypothesis whether import demand is affected by nuisance factors. Using the US data, we found imported goods consumption to be robust against nuisance factors, but not for domestic goods. Copyright © 2005 John Wiley & Sons, Ltd.

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Bibliographic Info

Article provided by John Wiley & Sons, Ltd. in its journal Journal of Applied Econometrics.

Volume (Year): 20 (2005)
Issue (Month): 7 ()
Pages: 841-872

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Handle: RePEc:jae:japmet:v:20:y:2005:i:7:p:841-872

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  1. David De La Croix & Jean-Pierre Urbain, 1998. "Intertemporal substitution in import demand and habit formation," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 13(6), pages 589-612.
  2. Christopher D. Carroll, 1997. "Death to the Log-Linearized Consumption Euler Equation! (And Very Poor Health to the Second-Order Approximation)," NBER Working Papers 6298, National Bureau of Economic Research, Inc.
  3. Ogaki, Masao & Park, Joon Y., 1997. "A cointegration approach to estimating preference parameters," Journal of Econometrics, Elsevier, vol. 82(1), pages 107-134.
  4. Heaton, John, 1995. "An Empirical Investigation of Asset Pricing with Temporally Dependent Preference Specifications," Econometrica, Econometric Society, vol. 63(3), pages 681-717, May.
  5. Cooley, Thomas F & Ogaki, Masao, 1996. "A Time Series Analysis of Real Wages, Consumption, and Asset Returns," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(2), pages 119-34, March-Apr.
  6. Ogaki, Masao, 1992. "Engel's Law and Cointegration," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 1027-46, October.
  7. Donald W.K. Andrews, 1988. "Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimation," Cowles Foundation Discussion Papers 877R, Cowles Foundation for Research in Economics, Yale University, revised Jul 1989.
  8. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
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Cited by:
  1. Shin-Ichi Nishiyama & Masao Ogaki, 2011. "The Cross-Euler Equation Approach in Estimating the Elasticity of Intertemporal Substitution for Food and Non-Food Consumption in Japan," TERG Discussion Papers 275, Graduate School of Economics and Management, Tohoku University.
  2. Chuanglian Chen & Guojin Chen & Shujie Yao, . "Do Imports Crowd Out Domestic Consumption? A Comparative Study of China, Japan and Korea," Discussion Papers 11/03, University of Nottingham, GEP.
  3. CHEN, Chuanglian & CHEN, Guojin & YAO, Shujie, 2012. "Do imports crowd out domestic consumption? A comparative study of China, Japan and Korea," China Economic Review, Elsevier, vol. 23(4), pages 1036-1050.

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