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Unobserved Heterogeneity and Intertemporal Nonseparability: Evidence from Consumption Panel Data

Author Info

Listed author(s):
  • Raquel Carrasco

    ()

    (Universidad Carlos III de Madrid)

  • Jose M. Labeaga

    (UNED)

  • J.David López-Salido

    (Banco de España)

Abstract

In this paper we analyze the importance of intertemporal non-separabilities for consumption decisions using household data. We follow the test suggested by Meghir and Weber (1996), so we exploit the variability of the within-period marginal rate of substitution (MRS) between commodities. We also check for the presence of liquidity constraints by comparing the results obtained from theMRS to those of the Euler equations. For that purpose, we use a Spanish data set in which households are observed up to eight consecutive quarters. This length of the temporal dimension is crucial, since it allows both to account for the dynamics of consumption in the preferences as well as to control for time invariant unobserved heterogeneity across households. Our results confirm the importance of accounting for fixed effects when analyzing intertemporal consumption decisions allowing for time non-separabilities. Once we control for fixed effects and use the adequate set of instruments we do not find evidence of misspecification and the results yield supporting evidence of habit formation.

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File URL: http://econpapers.repec.org/cpd/2002/61_Carrasco.pdf
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Paper provided by International Conferences on Panel Data in its series 10th International Conference on Panel Data, Berlin, July 5-6, 2002 with number C4-4.

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Date of creation: Mar 2002
Handle: RePEc:cpd:pd2002:c4-4
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Keywords: Consumption; panel data; unobserved heterogeneity; habits; durability;

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  2. Attanasio, Orazio P & Browning, Martin, 1995. "Consumption over the Life Cycle and over the Business Cycle," American Economic Review, American Economic Association, vol. 85(5), pages 1118-1137, December.
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  14. Jeffrey C. Fuhrer, 2000. "Habit Formation in Consumption and Its Implications for Monetary-Policy Models," American Economic Review, American Economic Association, vol. 90(3), pages 367-390, June.
  15. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 277-297.
  16. Heckman, James J, 1991. "Identifying the Hand of the Past: Distinguishing State Dependence from Heterogeneity," American Economic Review, American Economic Association, vol. 81(2), pages 75-79, May.
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