Measuring intertemporal substitution: The role of durable goods

Carmen Reinhart and Masao Ogaki

MPRA Paper from University Library of Munich, Germany

Abstract: 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.

Keywords: consumption; durable; goods; real; interest; rates; saving (search for similar items in EconPapers)
JEL-codes: D91 E2 (search for similar items in EconPapers)
Date: 1995-05
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Citations: View citations in EconPapers (15)

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Related works:
Journal Article: Measuring Intertemporal Substitution: The Role of Durable Goods (1998)
Working Paper: Measuring Intertemporal Substitution: The Role of Durable Goods (1995)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:13690

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