Masao Ogaki

Measuring Intertemporal Substitution: The Role of Durable Goods

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 clasticity is unlikely to be much above 0.1 and may well be zero. Applying improved inference methods to an economic model similar to Halls, 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.

Saving Behavior in Low and Middle-Income Developing Countries; A Comparison

The relationship between real interest rates, saving, and gre is a cen tral issue in development economics. Using iflaCrOecOnOFflic data for c cross-section of countries, we estimate a model in %i’hlc/I 1/ic intertemporal elasticity of subsutution varies with the level of wealth. The estimated pa ranieters are used to calculate, in the context of a simple endogenous g rowt/i model, the responsiveness of saving to real interest rate c/ian ges for countries at differing stages of developmnent. The hypothesis f/mat the saving rate, and its sensitivity to time interest rate, are a risinq function of income finds strong empirical support.

Wealth-Varying Intertemporal Elasticities of Substitution Evidence from Panel and Aggregate Data

Abstract This paper constructs and estimates a model of consumer preferences in which the intertemporal elasticity of substitution (IES) of consumption expenditure rises with the level of wealth. The purpose of this paper is to measure the effect that systematic variation in the IES of poor and rich consumers has on the IES of aggregate consumption expenditure. We find economically significant differences in the IES of poor and rich consumers in Indian panel data on the consumption of individual households. We also find economically significant differences in the IES measured in aggregate time series data for the U.S. and India.

A COINTEGRATION APPROACH TO ESTIMATING PREFERENCE PARAMETERS

In this paper, we estimate the (long-run) intertemporal elasticity of substitution of non-durable consumption, which has often been estimated with the generalized methods of moments (GMM). The GMM estimator, however, is not consistent in the presence of liquidity constraints, aggregation over heterogeneous consumers, unknown preference shocks, or a general form of time-nonseparability. We use Engle and Grangers cointegration methodology in order to develop an estimator which is consistent even in the presence of these factors. We then form a formal test that compares the estimates obtained using cointegration techniques with those obtained using GMM.

Decreasing Relative Risk Aversion and Tests of Risk Sharing

The relative risk aversion (RRA) coefficient of a household whose consumption is close to the subsistence level may be very high. For example, if consumption is exactly at the subsistence level, the household may not be willing to bear any risk. If this is the case, then the RRA coefficient must be a decreasing function of wealth for poor households. Therefore we should allow the possibility of decreasing RRA (DRRA) in testing the full risk sharing hypothesis. However, existing tests in the empirical literature are derived using preferences that exhibit either increasing or constant RRA even when they are applied to data containing low-income households. We therefore use a Hyperbolic Absolute Risk Aversion (HARA) utility, which implies increasing, constant, and decreasing RRA as special cases, to test full risk-sharing hypothesis. Using the International Food Policy Research Institute (IFPRI) and the International Crops Research Institute of the Semi-Arid Tropics (ICRISAT) household level data sets, we find evidence in support of the DRRA hypothesis, along with evidence favoring full risk-sharing hypothesis at the village level, and evidence against the hypothesis at the inter-village level. When RRA is restricted to be constant, we replicate the previous results in the literature: reject the full risk-sharing hypothesis at both levels. Our tests, however, reject this restriction and favor DRRA in almost all cases. These results suggest that it is important to allow for DRRA in testing the full risk-sharing hypothesis when data containing low-income households are investigated.

Saving Behavior in Low and Middle-Income Developing Countries

The impact of changes in real interest rates on saving and growth is a central issue in development economics. According to one familiar view, a financial liberalization program which increases real interest rates should encourage saving, thereby boosting investment and growth. While such liberalizations have indeed typically succeeded in raising real interest rates, their impact on private saving has been mixed. This paper uses macroeconomic data for a sample of countries with diverse income levels to estimate a model in which the intertemporal elasticity of substitution varies with the level of wealth. The estimated parameters are then used ta calculate, in the context of a simple endogenous growth model, the responsiveness of saving to real interest xate changes for countries at differing stages of development.

ENGEL'S LAW AND COINTEGRATION

A time-series counterpart of Engels law is that the expenditure share on food declines as the economy grows. The main purpose of this paper is to test whether Houthakkers addilog utility function can simultaneously explain this time-series observation and cross-sectional observations concerning Engels law. Ogaki and Parks cointegration approach is used to estimate parameters of the utility function from time-series data. Total expenditure elasticities implied by the estimated addilog utility function are compared with estimates of the elasticities from cross-sectional data.

Rate Of Time Preference, Intertemporal Elasticity Of Substitution, And Level Of Wealth

The rate of time preference (RTP) and the intertemporal elasticity of substitution (IES) are two important factors shaping intertemporal consumption decisions. Models in which the RTP and/or the IES differ systematically between rich and poor households have different empirical and policy implications for economic development, growth, and the distribution of income and consumption from those of standard models in which these parameters are constant across households. In this paper, we estimate a model in which both RTP and IES are allowed to differ across rich and poor households using household-level panel data from India. Our empirical results are consistent with the view that the RTP is constant across poor and rich households, but the IES is larger for the rich than it is for the poor.

Efficiency Bounds Implied by Multiperiod Conditional Moment Restrictions

Abstract In this article we study a class of econometric models that imply a set of multiperiod conditional moment restrictions. These restrictions depend on an unknown parameter vector. We construct an extensive class of consistent, asymptotically normal estimators of this parameter vector and calculate the greatest lower bound for the asymptotic covariance matrices of estimators in this class. In so doing, we extend results reported by Hansen (1985) and Stoica, Soderstrom, and Friedlander (1985), by allowing for more general forms of nonlinearities and temporal dependence. Many dynamic econometric models imply that the expectation of a function of a currently observed data vector and an unknown parameter vector conditioned on information available at some point in the past is 0. We focus on models in which the conditioning information is lagged more than one time period, as in the models considered by Barro (1981), Dunn and Singleton (1986), Eichenbaum and Hansen (1987), Eichenbaum, Hansen, and Singleto...

Real exchange rates and nontradables: A relative price approach

Abstract In this paper, we study long-run comovements of real exchange rates and relative prices of nontradables and tradables. This approach is complementary to many existing approaches to investigating real exchange rate movements. In many theoretical models of exchange rate determination, the relative prices of nontradables and tradables are linked to the real exchange rates by identities. However, they do not necessarily move with real exchange rates in reality because of many factors. For example, many tradables contain nontradable components in the form of retailing services, so that Purchasing Power Parity (PPP) may not hold for these tradable goods even in the long run. Hence real exchange rates may not move in the direction predicted by theoretical models when the producers of these tradable goods experience changes in productivity. In this paper, we identify time periods, countries and relative price measures for which comovements between real exchange rates and relative prices of nontradables and tradables are observed.