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Heterogenous intertemporal elasticity of substitution and relative risk aversion: estimation of optimal consumption choice with habit formation and measurement errors

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  • Natalia, Khorunzhina
  • Wayne Roy, Gayle

Abstract

This paper investigates the existence and degree of variation across house holds and over time in the intertemporal elasticity of substitution (IES) and the coefficient of relative risk aversion (RRA) that is generated by habit forming preferences. To do so, we develop a new nonlinear GMM estimator to investigate the presence of habit formation in household consumption using data from the Panel Study of Income Dynamics. Our method accounts for classical measurement errors in consumption without parametric assumptions on the distribution of measurement errors. The estimation results support habit formation in food consumption. Using these estimates, we develop bounds for the expectation of the implied heterogenous intertemporal elasticity of substitution and relative risk aversion that account for measurement errors and compute asymptotically valid confidence intervals on these bounds. We find that these parameters display significant variation across households and over time.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 34329.

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Date of creation: Jul 2011
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Handle: RePEc:pra:mprapa:34329

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Keywords: Nonlinear models; Classical measurement errors; Habit formation; Intertemporal elasticity of substitution; Relative risk aversion;

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Cited by:
  1. Irina Khvostova & Alexander Larin & Anna Novak, 2014. "Euler equation with habits and measurement errors: estimates on Russian micro data," HSE Working papers WP BRP 52/EC/2014, National Research University Higher School of Economics.

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