Unexploited Connections Between Intra- and Inter-temporal Allocation
AbstractThis 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 identified 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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Bibliographic InfoPaper provided by McMaster University in its series Social and Economic Dimensions of an Aging Population Research Papers with number 131.
Length: 29 pages
Date of creation: Sep 2005
Date of revision:
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elasticity of intertemporal substitution; Euler equation estimation; demand systems;
Other versions of this item:
- Crossley, T.F. & Low, H.W., 2005. "Unexploited Connections Between Intra- and Inter-temporal Allocation," Cambridge Working Papers in Economics 0537, Faculty of Economics, University of Cambridge.
- Thomas F. Crossley & Hamish W. Low, 2005. "Unexploited Connections Between Intra- and Inter-temporal Allocation," Quantitative Studies in Economics and Population Research Reports 395, McMaster University.
- D91 - Microeconomics - - Intertemporal Choice - - - Intertemporal Household Choice; Life Cycle Models and Saving
- E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
- D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-11-19 (All new papers)
- NEP-MAC-2005-11-19 (Macroeconomics)
- NEP-MIC-2005-11-19 (Microeconomics)
- NEP-UPT-2005-11-19 (Utility Models & Prospect Theory)
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