Estimating Intertemporal and Intratemporal Substitutions When Both Income and Substitution Effects are Present: The Role of Durable Goods
CERGE-EI and Economics Institute of the Academy of Sciences of the Czech Republic
May 1, 2009
Journal of Business and Economic Statistics, Vol. 29, No. 3, pp. 439-454, July 2011
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.
Number of Pages in PDF File: 16
Keywords: Durable goods, Intertemporal substitution, Intratemporal substitution, Nonhomotheticity
JEL Classification: E21, D12Accepted Paper Series
Date posted: April 10, 2009 ; Last revised: June 22, 2011
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