Elasticity Of Substitution In Consumption Research Articles

Can higher debt lead to higher welfare? A theoretical and numerical analysis

This paper demonstrates, for a two-good, two-country model with finitely-lived agents, the possibility of using national debt as a policy instrument to improve welfare via an improvement in the terms of trade. The latter is large enough to outweigh the negative effect of crowding out of capital that results from higher debt. It is shown that without retaliatory behaviour, a welfare-maximizing level of debt is theoretically obtainable for values less than half the elasticity of substitution in consumption. For a substitution elasticity equal to half zero debt is the optimum.

Private consumption, public consumption and liquidity constraints in developing countries: some empirical evidence

This paper extends the empirical work of Giovannini (1983, 1985) in seeking to identify the elasticity of substitution in consumption in developing countries using the Euler equation approach. Allowing for liquidity constraints in capital markets which force a percentage of aggregate consumption growth to track income growth to track income growth, we report static and time-varying estimates of this percentage and the elasticity of intertemporal substitution, as well as estimates of substitution between private and public consumption and implied utility function parameters. Our results suggest that liquidity constraints are a pervasive feature of developing country consumption data and that the elasticity of intertemporal substitution is near-zero for the majority of countries considered.

Farm‐Nonfarm Synergies in Africa: Discussion

sequence of low market integration and low substitutability between domestic and imported foods. In addition, if the geographical area over which these multipliers are calculated increases, the share of nontradables in the economy rises and multipliers are correspondingly larger. This leads the authors to praise the potential for a demand-led approach to both agricultural and industrial development, anchored in productivity gains in traditional exports. While the general proposition is reminiscent of the development strategies advanced by Mellor (1986), Adelman (1984), and Hazell (1984), and by now well accepted, the quantification of multiplier effects is inadequate. The model used makes unrealistic assumptions that systematically bias upward the size of the growth linkages induced by technological change in farm or nonfarm tradables. Denoting by T = tradables, T, = farm tradables, NT = nontradables, E = elasticity of supply response, ,qM = elasticity of substitution in consumption between output (q) and imports (M), and m, = income multiplier of an extra $1 of income from farm tradables, the key assumptions made by the authors are T: E = 0, , qM= o; and NT: E = o, YqM = a value which does not matter as long as E = oo. This yields local m, between 1.3 and 1.8 reported in table 2 of the Delgado et al. paper. Consider now the more realistic characteriza-

THE ESTIMATION OF SINGLE EQUATION RATIONAL EXPECTATIONS MODELS: AN APPLICATION TO UK CONSUMPTION

Rational expectations models in which the forecast horizon is not equal to the sampling interval may result in serially correlated errors. Valid inference requires adjustment to the variance-covariance matrix. This paper outlines SEREM (Statistical Estimation of Rational Expectations Models)--a computer package written in GAUSS that computes a number of estimators that have been proposed to circumvent this problem. An application of these estimators to U.K. consumption suggests that the intertemporal elasticity of substitution for consumption is numerically close to, but significantly different from, zero. Copyright 1993 by Blackwell Publishing Ltd

The Intertemporal Elasticity of Substitution in Consumption in the United States and the United Kingdom

As Robert E. Hall (1988) notes, the magnitude of the intertemporal elasticity of substitution in consumption is one of the central questions of macroeconomics. Do higher expected real interest rates lead to deferred consumption? The authors extend Hall's methodology and model, and compare results for the United Sta tes and the United Kingdom. In both cases, they directly estimate the mo ving average process that temporal aggregation might induce in the random disturbances and take account of consumers who do not follow the lif e cycle-permanent income model of consumption. Copyright 1992 by MIT Press.

Speculative attacks: The roles of intertemporal substitution and the interest elasticity of the demand for money

The effects of an anticipated speculative attack and exchange rate regime collapse brought on by an unsustainable mix of domestic credit and exchange rate policies is examined. A maximizing model with money demand motivated by a transactions technology which implies that increased money holdings reduce transactions costs associated with consumption good purchases is used. It is demonstrated that the effects of an impending speculative attack depend crucially on two margins through which the forward-looking behavior of rational consumers manifests itself the intertemporal elasticity of substitution in consumption and the interest elasticity of the demand for money.

Habit Formation: A Resolution of the Equity Premium Puzzle

The equity premium puzzle, identified by Mehra and Prescott, states that, for plausible values of the risk aversion coefficient, the difference of the expected rate of return on the stock market and the riskless rate of interest is too large, given the observed small variance of the growth rate in per capita consumption. The puzzle is resolved in the context of an economy with rational expectations once the time separability of von Neumann-Morgenstern preferences is relaxed to allow for adjacent complementarity in consumption, a property known as habit persistence. Essentially habit persistence drives a wedge between the relative risk aversion of the representative agent and the intertemporal elasticity of substitution in consumption.

Derationalizing tariffs with specialized intermediate inputs and differentiated final goods

Existing analyses of differentiated products suggest that a small tariff must be welfare improving, as a positive terms-of-trade effect and an increase in the number of domestic varieties outweighs the loss of foreign varieties. This result appears to be due to an arbitrary assumption that the intra-sectoral elasticity of substitution in consumption exceeds the inter-sectoral elasticity. This paper demonstrates that complementarity among specialized inputs (or differentiated final goods) implies that a small tariff can derationalize production sufficiently such that the number of domestic inputs/goods falls and welfare is reduced.

Tariffs, interest rates, and the trade balance in the world economy

A two-commodity intertemporal framework is used to show that, in contrast to the conventional wisdom, both permanent and temporary tariffs may worsen the trade balance of a large country. For a temporary tariff the key condition for this result is a low intertemporal elasticity of substitution in consumption. When a temporary tariff worsens the trade balance the world real interest rate must fall if the tariff-imposing country is running a deficit and rise if it is running a surplus. Temporary tariffs can only worsen the trade balance of a surplus country when international differences in tastes are important.

Non-Traded Goods and the International Transmission of Fiscal Policy

.Abstract. This paper looks at the effect of non-traded goods on the international transmission of fiscal policy. Intertemporal movements in the price of non-traded goods affect real interest rates differentially between countries. The real interest rate effects of a fiscal expansion depend crucially upon both the composition of fiscal spending and the intertemporal elasticity of substitution. With a high intertemporal elasticity of substitution in consumption, a temporary fiscal expansion on non-traded goods will lead consumer real interest rates to move in opposite directions between countries.

Fiscal spending, the terms of trade, and real interest rates

This paper investigates the international movements in real interest rates and investment spending in response to a temporary fiscal expansion in one country. It is shown that fiscal expansion may lead investment spending to be negatively correlated across countries. This is because real interest rates relevant for investment purposes may move asymmetrically between countries in response to an expansion in fiscal spending. The crucial factors which determine whether or not this occurs are: (a) a transfer criterion which depends upon the spending propensities of the government relative to those of private consumers, and (b) the intertemporal elasticity of substitution in consumption.

On Relations between Price Elasticities and the Elasticity of Substitution in Consumption: A Comment

On Relations between Price Elasticities and the Elasticity of Substitution in Consumption: A Comment

On Relations between Price Elasticities and the Elasticity of Substitution in Consumption: A Reply

On Relations between Price Elasticities and the Elasticity of Substitution in Consumption: A Reply

The Gain from Exploiting Monopoly or Monopsony Power in International Trade

The argument for protection, and the prospective gains for a country to be had by exploiting it, play a large part in the literature of trade policy for economic development. There is a widespread impression in this literature that the potential gains available to under-developed countries from this source are substantial. This Note investigates the problem, using some very simple models of the welfare derivable from trade, selected because they are capable of yielding quantitative results. Its purpose is to call attention to the generally neglected points that while the optimum tariff rate varies inversely with the elasticity of demand for exports or supply of imports, and may be surprisingly high when the relevant elasticity is low, the gain in real income derivable from applying the optimum tariff depends on certain structural characteristics of the tariff-imposing country, which may be such as make the resulting gain relatively small by comparison with the level of welfare enjoyed under free trade. In the first place, the gain depends on the nature of the domestic preference system, and especially on the elasticities of substitution between imports and exports in domestic consumption-and production-and will tend to be low when those elasticities are low, as they are generally presumed to be for lessdeveloped countries. In the second place, the gain depends on the magnitude of the free-trade ratio of imports to national income, and will tend to be lower the lower that ratio; and while this ratio may be assumed to be generally higher for less developed than for developed countries, its influence on the order of magnitude of the gain from optimum tariff policy is a relevant consideration. Throughout it is assumed that the economy contemplating imposing an optimum tariff is completely specialized in producing a fixed amount of Xof its exportable good, which it exports in return for its import good Y. This assumption is not as restrictive as it may seem, since X may be taken as a measure of the economy's total productive capacity, and the possibility of substituting for imports through domestic production absorbed into the magnitude of the elasticity of substitution in consumption. It is also assumed that the preference system of the country is homothetic-goods would be consumed in the same ratios at the same relative prices regardless of income level, i.e. the income elasticity of demand for each is unity-and that the marginal utility of income is constant. A little mental experimentation with the usual optimumtariff geometry will show that the former assumption will overstate the gains from an optimum tariff policy if, as it seems reasonable to