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Unexploited connections between intra- and inter-temporal allocation

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Author Info
Thomas Crossley () (Institute for Fiscal Studies and University of Cambridge)
Hamish Low () (Institute for Fiscal Studies and Trinity College, Cambridge)

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Abstract

This paper shows that a power utility specification of preferences over total expenditure (ie. CRRA preferences) implies that intratemporal demands are in the PIGL/PIGLOG class. This class generates (at most) rank two demand systems and we can test the validity of power utility on cross-section data. Further, if we maintain the assumption of power utility, and within period preferences are not homothetic, then the intertemporal preference parameter is identi…ed by the curvature of Engel curves. Under the power utility assumption, neither Euler equation estimation nor structural consumption function estimation is necessary to identify the power parameter. In our empirical work, we use demand data to estimate the power utility parameter and to test the assumption of the power utility representation. We find estimates of the power parameter larger than obtained from Euler equation estimation, but we reject the power specification of within period utility.

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Publisher Info
Paper provided by Institute for Fiscal Studies in its series IFS Working Papers with number W05/25.

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Length: 24 pp.
Date of creation: Nov 2005
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Handle: RePEc:ifs:ifsewp:05/25

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Related research
Keywords: Elasticity of intertemporal substitution; Euler equation estimation; demand systems;

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Find related papers by JEL classification:
D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving
E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis

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References listed on IDEAS
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  6. Atkeson, Andrew & Ogaki, Masao, 1996. "Wealth-varying intertemporal elasticities of substitution: Evidence from panel and aggregate data," Journal of Monetary Economics, Elsevier, vol. 38(3), pages 507-534, December. [Downloadable!] (restricted)
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