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Measuring Intertemporal Substitution: The Role of Durable Goods

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  • Masao Ogaki
  • Carmen M. Reinhart

Abstract

As pointed out by Hall (1988), intertemporal substitution by consumers is a central element of many modern macroeconomic and international models. For example, many of the policy implications of an endogenous growth model studied by Barro (1990) depends on the assumption that the intertemporal elasticity of substitution is positive. In estimating the intertemporal elasticity of substitution (IES), however, Hall (1988) fmds that when time aggregation is taken into account, his point estimates are small and not significantly different from zero. Hall concludes that ti:e elasticity is unlikely to be much above 0.1 and may well be zero. We argue that Hall's estimator for the IES is downward biased because the intra-temporal substitution between nondurable consumption goods and durable consumption goods is ignored and because the changes in real interest rates affect user costs of durable goods. We use a two-step procedure that combines a cointegration approach to preference parameter estimation with Hansen and Singleton's (1982) Generalized Method of Moments approach in order to take these effects into account. In contrast to Hall's result, our estimates for the IES are positive and significantly different from zero even when time aggregation is taken into account.

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Bibliographic Info

Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 106 (1998)
Issue (Month): 5 (October)
Pages: 1078-1098

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Handle: RePEc:ucp:jpolec:v:106:y:1998:i:5:p:1078-1098

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  2. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-87, December.
  3. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
  4. Gordon, Robert J., 1990. "The Measurement of Durable Goods Prices," National Bureau of Economic Research Books, University of Chicago Press, edition 1, number 9780226304557, April.
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  8. Kocherlakota, Narayana R., 1990. "On tests of representative consumer asset pricing models," Journal of Monetary Economics, Elsevier, vol. 26(2), pages 285-304, October.
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  10. 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.
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  12. Donald W.K. Andrews & Christopher J. Monahan, 1990. "An Improved Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimator," Cowles Foundation Discussion Papers 942, Cowles Foundation for Research in Economics, Yale University.
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