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Estimating Intertemporal and Intratemporal Substitutions When Both Income and Substitution Effects Are Present: The Role of Durable Goods

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  • Michal Pakoš

Abstract

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.

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  • Michal Pakoš, 2011. "Estimating Intertemporal and Intratemporal Substitutions When Both Income and Substitution Effects Are Present: The Role of Durable Goods," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 29(3), pages 439-454, July.
    • Handle: RePEc:taf:jnlbes:v:29:y:2011:i:3:p:439-454
    DOI: 10.1198/jbes.2009.07046
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    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles

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