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The Cross-Euler Equation Approach in Estimating the Elasticity of Intertemporal Substitution for Food and Non-Food Consumption in Japan

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  • Shin-Ichi Nishiyama
  • Masao Ogaki

Abstract

We use the standard two-good version of the life cycle/permanent income model in analyzing the intratemporal and intertemporal aspect of food and non-food expenditure in Japan. The empirical dilemma in identifying and estimating the parameters governing the intertemporal elasticity of substitution (IES) is addressed. In overcoming this empirical dilemma we employ the Cross-Euler equation approach proposed by Nishiyama (2005). The IES parameters are estimated by exploiting the cointegration restriction implied by the Cross-Euler equation and also from the standard Euler equation using GMM. Further, by comparing the IES estimates from the Cross-Euler equation to those from the standard Euler equation, we formally test the hypothesis whether food and non-food expenditure in Japan is affected by some factors that cause misspecification in the standard Euler equation approach, such as liquidity constraints or habit formation.

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File URL: http://hdl.handle.net/10097/55407
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Bibliographic Info

Paper provided by Graduate School of Economics and Management, Tohoku University in its series TERG Discussion Papers with number 275.

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Length: 32 pages
Date of creation: Sep 2011
Date of revision:
Handle: RePEc:toh:tergaa:275

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  1. Peter M. Garber & Robert G. King, 1983. "Deep Structral Excavation? A Critique of Euler Equation Methods," NBER Technical Working Papers 0031, National Bureau of Economic Research, Inc.
  2. Shin-Ichi Nishiyama, 2005. "The cross-Euler equation approach to intertemporal substitution in import demand," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 20(7), pages 841-872.
  3. Zeldes, Stephen P, 1989. "Consumption and Liquidity Constraints: An Empirical Investigation," Journal of Political Economy, University of Chicago Press, vol. 97(2), pages 305-46, April.
  4. Hansen, Lars Peter & Heaton, John & Yaron, Amir, 1996. "Finite-Sample Properties of Some Alternative GMM Estimators," Journal of Business & Economic Statistics, American Statistical Association, vol. 14(3), pages 262-80, July.
  5. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
  6. Heaton, John, 1995. "An Empirical Investigation of Asset Pricing with Temporally Dependent Preference Specifications," Econometrica, Econometric Society, vol. 63(3), pages 681-717, May.
  7. Ogaki, Masao & Park, Joon Y., 1997. "A cointegration approach to estimating preference parameters," Journal of Econometrics, Elsevier, vol. 82(1), pages 107-134.
  8. 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.
  9. Amano, Robert A. & Wirjanto, Tony S., 1996. "Intertemporal substitution, imports and the permanent income model," Journal of International Economics, Elsevier, vol. 40(3-4), pages 439-457, May.
  10. Masao Ogaki & Chi-Young Choi, 2001. "The Gauss-Markov Theorem and Spurious Regressions," Working Papers 01-13, Ohio State University, Department of Economics.
  11. Okubo, Masakatsu, 2003. "Intratemporal substitution between private and government consumption: the case of Japan," Economics Letters, Elsevier, vol. 79(1), pages 75-81, April.
  12. Masao Ogaki & Jonathan D. Ostry & Carmen M. Reinhart, 1996. "Saving Behavior in Low- and Middle-Income Developing Countries: A Comparison," IMF Staff Papers, Palgrave Macmillan, vol. 43(1), pages 38-71, March.
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