Measuring Intertemporal Substitution in Consumption: Evidence from a VAT Increase in Japan

David Cashin and Takashi Unayama
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David Cashin: Federal Reserve Board of Governors

The Review of Economics and Statistics, 2016, vol. 98, issue 2, 285-297

Abstract: We estimate the intertemporal elasticity of substitution in consumption (IES) using a preannounced increase in Japan’s consumption tax rate. Because this tax is highly comprehensive, the rate increase was announced prior to its implementation, and because other factors that affect the real interest rate were constant, the tax rate increase presents an ideal natural experiment to estimate the IES. A Japanese monthly household survey is exploited to accurately categorize nondurables, and our empirical specification addresses intratemporal substitution bias. We find that the IES is 0.21 and not significantly different from 0, but it is significantly less than 1.

Keywords: Intertemporal Substitution; Consumption; Japanese Consumption Tax; VAT (search for similar items in EconPapers)
JEL-codes: D12 D91 E21 E60 H24 H31 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (56)

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