Measuring Intratemporal and Intertemporal Substitutions When Both Income and Substitution Effects Are Present: The Role of Consumer Durables

Hall (1988) estimates the intertemporal substitutability for nondurable goods economically and statistically insignificant. Ogaki and Reinhart (1998) introduce the service flow from durable goods using within-period-nonseparable homothetic preference specification. They estimate the intertemporal substitutability significant - around 0.4, and the intratemporal substitutability greater than one. I show that homotheticity induces a surprisingly dramatic statistical bias in the estimates of the intratemporal and intertemporal substitutions. Using aggregate consumption data, I discover that the estimate of the intertemporal substitutability is economically quite negligible - on the order of 0.04, a magnitude close to Hall’s original estimate. In addition, I estimate the intratemporal substitutability between nondurable goods and service flow from the stock of consumer durable goods economically small as well - around 0.18. In addition, I find potent support in favor of nonhomotheticity, with nondurable goods being necessities and durable goods luxuries. Despite that, due to the secular decline of the rental cost, the budget share of consumer durable goods appears trendless.