Intertemporal Substitution in Consumption Revisited

Zuliu Hu

No 1993/026, IMF Working Papers from International Monetary Fund

Abstract: Some of the highly controversial questions in macroeconomics critically hinge on the value of a single parameter of consumer preference--the elasticity of intertemporal substitution. This paper provides new estimates of this parameter for individual G-7 and a panel of twenty OECD countries. We find that single equation GMM estimates are typically small and imprecise, consistent with Hall’s (1988) finding from the U.S. data. Estimation of a system of equations that takes into account the cross-equation restrictions implied by theory, however, generally gives larger and better determined values for the parameter. The panel procedure also yields relatively large estimates. Overall our multi-country results contradict the hypothesis of zero intertemporal substitution.

Keywords: WP; utility function; consumption growth; Treasury bill yield; return equation; cross-equation restriction; GMM estimation; Consumption; Treasury bills and bonds; Estimation techniques; Deposit rates; Real interest rates (search for similar items in EconPapers)
Pages: 26
Date: 1993-03-01
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Persistent link: https://EconPapers.repec.org/RePEc:imf:imfwpa:1993/026

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