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Estimating intertemporal and intratemporal substitutions when both income and substitution effects are present: the role of durable goods

  • pakos, michal
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    Homotheticity induces a dramatic statistical bias in the estimates of the intratemporal and intertemporal substitutions. I find potent support in favor of nonhomotheticity in aggregate consumption data, with nondurable goods being necessities and durable goods luxuries. I obtain the intertemporal substitutability negligible (0.04), a magnitude close to Hall’s (1988) original estimate, and the intratemporal substitutability between nondurable goods and service flow from the stock of durable goods small as well (0.18). Despite that, due to the secular decline of the rental cost, the budget share of durable goods appears trendless.

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    File URL: http://mpra.ub.uni-muenchen.de/32453/1/MPRA_paper_32453.pdf
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    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 32453.

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    Date of creation: 01 Jul 2011
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    Publication status: Published in Journal of Business and Economic Statistics 3.29(2011): pp. 439-454
    Handle: RePEc:pra:mprapa:32453
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