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Intertemporal preference parameters for some European monetary union countries

[journal article]

Márquez de la Cruz, Elena; Martinez-Cañete, Ana R.; Pérez-Soba Aguilar, Inés

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Abstract In the European Monetary Union, the estimation and analysis of preference parameters in its members is of special interest because possible differences could help us to understand why a common monetary policy could have different effects on the different economies involved. In this paper we have focused our attention on the elasticity of intertemporal substitution, one of the key preference parameters in intertemporal macroeconomic models. Different studies have shown a possible underestimation of such elasticity for different countries. It is common practice to estimate the parameter using only non-durable goods and service consumption data, without referring to the service flows generated by durable consumption. This is only admissible if the intratemporal utility can be separated among the different consumption components. Our priority objective is therefore to test the assumption of intratemporal separability for a selection of European countries (Germany, Spain and France), and then to analyse the effect of durable consumption on the estimated values of the intertemporal elasticity of substitution of these countries, our ultimate goal. Knowledge of such elasticity will enable us to characterise how saving in these economies reacts to variations in the real interest rate.
Classification Political Economy; Economic Policy
Free Keywords intratemporal non-separability of preferences; intratemporal elasticity of substitution; durable and nondurable consumption
Document language English
Publication Year 2007
Page/Pages p. 997-1011
Journal Applied Economics, 39 (2007) 8
DOI http://dx.doi.org/10.1080/00036840500462012
Status Postprint; peer reviewed
Licence PEER Licence Agreement (applicable only to documents from PEER project)