Measuring Intertemporal Substitution: The Role of Durable Goods

Posted: 30 Dec 1998

See all articles by Masao Ogaki

Masao Ogaki

Ohio State University

Carmen M. Reinhart

Peter G. Peterson Institute for International Economics; National Bureau of Economic Research (NBER)

Abstract

In estimating the intertemporal elasticity of substitution, Hall finds that, when one takes account of time aggregation, point estimates are small and not significantly different from zero. He concludes that the elasticity is unlikely to be much above 0.1 and may well be zero. Applying improved inference methods to an economic model similar to Hall's, Hansen and Singleton show that there is considerably less precision in the estimation. We argue that the model used by these authors is misspecified because the intratemporal substitution between nondurable consumption goods and durable consumption goods is ignored. We use a two-step procedure that combines a cointegration approach to preference parameter estimation with generalized method of moments to take these effects into account. Our estimates for the intertemporal elasticity of substitution are positive and significantly different from zero, even when time aggregation is taken into account.

JEL Classification: E1

Suggested Citation

Ogaki, Masao and Reinhart, Carmen M., Measuring Intertemporal Substitution: The Role of Durable Goods. Journal of Political Economy, Vol. 106, No. 5, October 1998. Available at SSRN: https://ssrn.com/abstract=128916

Masao Ogaki (Contact Author)

Ohio State University ( email )

410 Arps Hall
1945 N. High St.
Columbus, OH 43210-1172
United States
614-292-5842 (Phone)
614-292-3906 (Fax)

Carmen M. Reinhart

Peter G. Peterson Institute for International Economics ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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