A COINTEGRATION APPROACH TO ESTIMATING PREFERENCE PARAMETERS

In this paper, we estimate the (long-run) intertemporal elasticity of substitution of nondurable consumption, which has often been estimated with the generalized methods of moments (GMM). The GMM estimator, how ever, is not consistent in the presence of liquidity constraints, aggr egation over heterogeneous consumers, unknown preference shocks, or a general form of time-nonseparability. We use Engle and Granger's coint egration methodology in order to develop an estimator which is consist ent even in the presence of these factors. We then form a formal test that compares the estimates obtained using cointegration techniques wi th those obtained using GMM. (C) 1997 Elsevier Science S.A.