MEASURING INTER-TEMPORAL 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 th e elasticity is unlikely to be much above 0.1 and may well be zero. Ap plying improved inference methods to an economic model similar to Hall 's, Hansen and Singleton show that there is considerably less precisio n 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 preferenc e parameter estimation with generalized method of moments to take thes e effects into account. Our estimates for the intertemporal elasticity of substitution are positive and significantly different from zero, e ven when time aggregation is taken into account.