A panel cointegration approach to estimating substitution elasticities in consumption

Auteri, Monica; Costantini, Mauro

doi:10.1016/j.econmod.2010.01.021

Cited by 26 publications

(17 citation statements)

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“…Bean () argues that “not all public spending is of the hole‐in‐the‐ground variety; spending on services such as health and education and on the police force is a substitute for private expenditure.” Although this statement suggests that private and public consumption may not be separable, many studies include government spending in an addilog utility function as introduced in Equation . Examples are Auteri and Constantini (), Ho (), and Nieh and Ho () who estimate values of the EIS in private consumption below 0.45, between 1.25 and 7.5 (depending on different subsamples, see Section ), and around 0.8.…”

Section: Consumers' Preferences and The Eismentioning

confidence: 99%

Intertemporal Substitution in Consumption: A Literature Review

Thimme

2016

Journal of Economic Surveys

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Abstract. This paper reviews the status quo of the empirical literature about the elasticity of intertemporal substitution (EIS) in consumption. Aiming to answer the question what the true magnitude of the parameter really is, it discusses several recent advances of the theory and highlights challenges for the estimation. Although the general discussion still seems to be prevailed by Hall's early EIS estimates close to zero, we show that several deviations from the time-additive constant relative risk aversion model speak in favor of considerably higher values. Our treatment is supposed to provide researchers a hint at which parameter is a reasonable and incontrovertible choice for the calibration of models in macroeconomics and finance.

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Section: Consumers' Preferences and The Eismentioning

confidence: 99%

Intertemporal Substitution in Consumption: A Literature Review

Thimme

2016

Journal of Economic Surveys

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“…Following Auteri and Costantini (), we also compute residual cross‐correlations of the consumption equation. They have an average of 0.49 and range between 0.02 and 0.84, dictating the correction for cross‐sectional dependence.…”

Section: Resultsmentioning

confidence: 99%

“…The reliance on this set of countries makes such an approach powerful in light of the similarity of households' preferences, as revealed by their long‐run elasticities of consumption with respect to asset wealth and labor income, and implied asset and human wealth shares (Afonso & Sousa, ). In fact, an important attraction of panel data is the ability to pool long‐run information about cointegration parameters (Auteri & Costantini, ). When estimating

c a y

, our paper uses panel cointegration techniques that assume cross‐sectional dependence through factor models that capture common drivers to which euro area countries are exposed.…”

Section: Introductionmentioning

confidence: 99%

“…When estimating

c a y

, our paper uses panel cointegration techniques that assume cross‐sectional dependence through factor models that capture common drivers to which euro area countries are exposed. Thereby, we account for individual member states' interdependence (Auteri & Costantini, ) and take care of the likely violation of cross‐sectional independence in forecasting regressions involving traditional panels of macrofinancial data (Hjalmarsson, ). This is our second key improvement vis‐à‐vis the research on the field.…”

Section: Introductionmentioning

confidence: 99%

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Consumption, asset wealth, equity premium, term spread, and flight to quality

Costantini

Sousa

2019

Euro Fin Management

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We link transitory deviations of consumption from its equilibrium relationship with aggregate wealth and labor income to equity returns on the one hand, and to two characteristics of bond investors-the premium demanded to hold long-term assets, and "flight to quality" behavior-on the other hand. Using a panel of 10 euro area countries over the period 1984Q1-2017Q4, we show that a rise in the consumption-wealth ratio predicts both higher equity returns and the future term spread, while a fall in the consumption-wealth ratio explains a large fraction of the rise in the spread between the "risky" and the "safe-haven" bond.

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“…The main advantage of this approach corresponds to the fact that it is not necessary to know the order of integration of the constituent variables. The presence of cross-sectional dependence is modelled by a factor model in which the residuals are obtained by common unobservable factors across the constituent countries (Auteri & Costantini, 2010).…”

Section: Resultsmentioning

confidence: 99%

An investigation of the effects of income inequality on financial fragility: Evidence from Organization for Economic Co‐operation and Development countries

Amountzias

2018

Int. J Fin Econ

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The main scope of the paper is to investigate the proposition that rising income inequality results in systemic financial instability in developed countries. In particular, 33 OECD (Organization for Economic Co‐operation and Development) countries are studied in a panel Vector Autoregression (VAR) framework analysis over 1995–2015. There is a growing literature on the effects of income inequality on financial crises. This study provides significant evidence in favour of a positive relationship between income inequality and financial fragility, when particular factors are controlled for. Complementary findings also suggest that (a) debt accumulation in the private sector significantly depends on credit expansion, (b) the debt levels of the private sector and households co‐move over time, and (c) financial deregulation significantly contributes to financial instability. Therefore, policymakers should take into account regulatory reforms that will promote institutional and financial innovations to restrict debt accumulation and render the financial system more robust to destabilising shocks.

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A panel cointegration approach to estimating substitution elasticities in consumption

Cited by 26 publications

References 27 publications

Intertemporal Substitution in Consumption: A Literature Review

Intertemporal Substitution in Consumption: A Literature Review

Consumption, asset wealth, equity premium, term spread, and flight to quality

An investigation of the effects of income inequality on financial fragility: Evidence from Organization for Economic Co‐operation and Development countries

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