IMF Working Papers

Intertemporal Substitution in Consumption Revisited

Author/Editor:

Zuliu Hu

Publication Date:

March 1, 1993

Summary:

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.

Series:

Working Paper No. 1993/026

Subject:

Consumption Deposit rates Econometric analysis Estimation techniques Financial institutions Financial services National accounts Real interest rates Treasury bills and bonds

Notes:

Study based on data from individual G-7 and a panel of twenty OECD countries.