Abstract
This compilation of summaries of Working Papers released during January-June 1993 is being issued as a part of the Working Paper series. It is designed to provide the reader with an overview of the research work performed by the staff during the period. Authors of Working Papers are normally staff members of the Fund or consultants, although on occasion outside authors may collaborate with a staff member in writing a paper. The views expressed in the Working Papers or their summaries are, however, those of the authors and should not necessarily be interpreted as representing the views of the Fund. Copies of individual Working Papers and information on subscriptions to the annual series of Working Papers may be obtained from IMF Publication Services, International Monetary Fund, 700 19th Street, Washington, D.C. 20431. Telephone: (202) 623-7430 Telefax: (202) 623-7201
The elasticity of intertemporal substitution is an important determinant of the response of saving and consumption to the real interest rate. Summers (1984) argued that the intertemporal substitution effect was strong, whereas Hall (1988), drawing evidence from U.S. data, concluded that its value is close to zero. Hall maintained that the previous higher estimates obtained by Summers (1982) and others are due to inappropriate treatment of the time aggregation bias and can therefore be dismissed.
This paper, which addresses the specification issues raised by Hall, extends the earlier research to an international context by examining data from twenty OECD countries. The Kreps-Porteus nonexpected utility preference is adopted, and distributional restrictions are imposed to derive a simple relation that governs the covariation of consumption growth and asset returns, which allows unambiguous identification of the intertemporal substitution parameter.
The single-equation generalized method of moments estimates for each of the seven major industrial countries are typically small and imprecise, corroborating Hall’s earlier finding from the U.S. data. The full information maximum likelihood estimation, however, gives larger and more precise values for the parameter, possibly because of the efficiency gain of system estimation. The panel procedure also yields relatively large estimates. Overall, the multicountry evidence seems to contradict the hypothesis of zero intertemporal substitution.
The results presented in this paper imply, among other things, that a shift toward expenditure taxation would probably lead to increases in private savings.