Measuring Intertemporal Substitution in Consumption: Evidence from a VAT Increase in Japan

David Unayama Cashin · Takashi Unayama

92 citations0/0 files storedThe Review of Economics and Statistics

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Monetary Policy and Economic Impact Economic and Fiscal Studies Economics of Agriculture and Food Markets

Abstract

Abstract We estimate the intertemporal elasticity of substitution in consumption (IES) using a preannounced increase in Japan’s consumption tax rate. Because this tax is highly comprehensive, the rate increase was announced prior to its implementation, and because other factors that affect the real interest rate were constant, the tax rate increase presents an ideal natural experiment to estimate the IES. A Japanese monthly household survey is exploited to accurately categorize nondurables, and our empirical specification addresses intratemporal substitution bias. We find that the IES is 0.21 and not significantly different from 0, but it is significantly less than 1.

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References

1989Dynamic Fiscal Policy.1988Intertemporal Substitution in Consumption 1981Intertemporal Substitution in Consumption 2002Limited Asset Market Participation and the Elasticity of Intertemporal Substitution 1995Is Consumption Growth Consistent with Intertemporal Optimization? Evidence from the Consumer Expenditure Survey 2010Consumption and Saving: Models of Intertemporal Allocation and Their Implications for Public Policy 1993Consumption Growth, the Interest Rate and Aggregation 1995Measuring inter-temporal substitution: The role of durable goods

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