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Measuring intertemporal substitution: The role of durable goods

  • Reinhart, Carmen
  • Ogaki, Masao

As pointed out by Hall (1988), intertemporal substitution by consumers is a central element of many modern macroeconomic and international models. For example, many of the policy implications of an endogenous growth model studied by Barro (1990) depends on the assumption that the intertemporal elasticity of substitution is positive. In estimating the intertemporal elasticity of substitution (IES), however, Hall (1988) fmds that when time aggregation is taken into account, his point estimates are small and not significantly different from zero. Hall concludes that ti:e elasticity is unlikely to be much above 0.1 and may well be zero. We argue that Hall's estimator for the IES is downward biased because the intra-temporal substitution between nondurable consumption goods and durable consumption goods is ignored and because the changes in real interest rates affect user costs of durable goods. We use a two-step procedure that combines a cointegration approach to preference parameter estimation with Hansen and Singleton's (1982) Generalized Method of Moments approach in order to take these effects into account. In contrast to Hall's result, our estimates for the IES are positive and significantly different from zero even when time aggregation is taken into account.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 13690.

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Date of creation: May 1995
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Handle: RePEc:pra:mprapa:13690
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  1. Donald W.K. Andrews & Christopher J. Monahan, 1990. "An Improved Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimator," Cowles Foundation Discussion Papers 942, Cowles Foundation for Research in Economics, Yale University.
  2. Reinhart, Carmen & Ostry, Jonathan, 1992. "Saving and Terms of Trade Shocks: Evidence from Developing Countries," MPRA Paper 6976, University Library of Munich, Germany.
  3. Rebelo, Sergio, 1992. "Growth in open economies," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 36(1), pages 5-46, July.
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  9. Eichenbaum, Martin & Hansen, Lars Peter, 1990. "Estimating Models with Intertemporal Substitution Using Aggregate Time Series Data," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(1), pages 53-69, January.
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  11. Gordon, Robert J., 1990. "The Measurement of Durable Goods Prices," National Bureau of Economic Research Books, University of Chicago Press, edition 1, number 9780226304557.
  12. Hansen, Lars Peter & Singleton, Kenneth J, 1982. "Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations Models," Econometrica, Econometric Society, vol. 50(5), pages 1269-86, September.
  13. Jonathan David Ostry & Carmen Reinhart, 1991. "Private Saving and Terms of Trade Shocks; Evidence From Developing Countries," IMF Working Papers 91/100, International Monetary Fund.
  14. Dunn, Kenneth B. & Singleton, Kenneth J., 1986. "Modeling the term structure of interest rates under non-separable utility and durability of goods," Journal of Financial Economics, Elsevier, vol. 17(1), pages 27-55, September.
  15. West, Kenneth D, 1988. "Asymptotic Normality, When Regressors Have a Unit Root," Econometrica, Econometric Society, vol. 56(6), pages 1397-1417, November.
  16. Barro, Robert J., 1990. "Government Spending in a Simple Model of Endogeneous Growth," Scholarly Articles 3451296, Harvard University Department of Economics.
  17. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-87, December.
  18. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
  19. 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.
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  23. Park, J.Y. & Ogaki, M., 1991. "Inference in Cointegrated Models Using VAR Prewhitening to Estimate Shortrun Dynamics," RCER Working Papers 281, University of Rochester - Center for Economic Research (RCER).
  24. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
  25. Cooley, Thomas F & Ogaki, Masao, 1996. "A Time Series Analysis of Real Wages, Consumption, and Asset Returns," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(2), pages 119-34, March-Apr.
  26. Ogaki, M., 1990. "Engel'S Law And Cointegration," RCER Working Papers 228, University of Rochester - Center for Economic Research (RCER).
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