Comments on "Large Estimates of the Elasticity of Intertemporal Substitution: is it the aggregate...
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Transcript of Comments on "Large Estimates of the Elasticity of Intertemporal Substitution: is it the aggregate...
Comments on ’Large Estimates of theElasticity of Intertemporal Substitution: is
it the aggregate return series or theinstrument list?’
by Fabio Gomes and Lourenco Paz
Matheus Albergaria de Magalhaes1
1Instituto Jones dos Santos Neves (IJSN) and FUCAPE Business School
Quarto Encontro de Economia do Espırito Santo (IV EEES)November 4t.h, 2013
Organization
Contribution
Motivation
Suggestions
Conclusions
References
Contribution
I Main focus of the paper: elasticity of intertemporalsubstitution (EIS).
I Authors revisit estimation issues related to the EIS (e.g.,
Gomes and Paz 2013a).
I Two main contributions:
1. Investigate if Mulligan’s (2002) estimates are plagued by theweak instrument problem (Stock, Wright and Yogo 2002).
2. Estimate Mulligan’s specifications using Yogo’s (2004) andDacy and Hasanov’s (2011) instrument sets.
Contribution
I Results indicate that Mulligan’s (2002) aggregate capitalreturn series is able to deliver relatively large and statisticallysignificant estimates of the EIS (greater than one).
I Additionaly, Mulligan’s original instrument set does not sufferfrom the weak instrument problem.
I Conclusion: the aggregate capital return series constructed byMulligan (2002) is the reason behind large EIS estimates.
Motivation
I EIS: why should we care?
I Economists have worried about EIS issues for a long time(e.g., Hansen 1985).
I EIS is an important parameter in several areas of Economicsand Finance.
I A few examples:
1. Effects of inflation.
2. Incidence effects of capital taxes.
3. Aggregate effects of financial intermediation.
4. Business-Cycle analysis.
Motivation
I Problem: empirical literature produced very mixed results.
I Time-series studies: EIS values close to 0.
I Panel Data studies: EIS values around 1.
I Results seem to depend on measure used as proxy for theexpected real rate of return (generally not observed) (Murray
2006).
Motivation
EIS - Country Heterogeneity
Source: Havranek et al. (2013, Fig.2, p.7).
Motivation
EIS - Method Heterogeneity
Source: Havranek et al. (2013, Fig.3, p.8).
Motivation
EIS - Impact Heterogeneity
Source: Havranek et al. (2013, Fig.1, p.2).
Suggestions
I Authors present a very interesting analysis.
I I learned a great deal from this paper.
I My suggestions will focus mainly on future research.
Suggestions
I Suggestion 1: estimate EIS through cointegration techniques.
I Favero (2005) used a recursive Epstein-Zin utility functionand a linearized intertemporal budget constraint to derive anexplicit long-run consumption function.
I New possibility: evaluation of future discounted labourincome growth as a determinant of the current value ofhuman capital.
Suggestions
I Suggestion 2: use capital income tax rate.
I Motivation: conditional on observable characteristics ofindividuals, tax rate movements cause exogenous shifts in theafter-tax interest rate.
I Using data on total non-durable consumption from theConsumer Expenditure Survey (CEX) over a two-decadeperiod, Gruber (2006) estimates a surprisingly high value forthe EIS (around 2).
I New possibility: Mulligan’s aggregate return series may notbe the only reason behind large values for the EIS.
Conclusions
I At the end of the day, EIS still poses an empirical puzzle foreconomists.
I Weak instruments seem to be a major concern in this case...
I ...but I feel that the search for aggregate return series mayprovide more interesting (and intuitive) answers in the nearfuture.
I Conclusion: authors should focus on finding empiricalmeasures that reflect EIS on theoretical grounds.
References
DACY, D.; HASANOV, F. A finance approach to estimating consumption parameters.
Economic Inquiry, v.49, n.1, p.122-154, 2011.
FAVERO, C.A. Consumption, wealth, the elasticity of intertemporal substitution and
long-run stock market returns. Bocconi University, Mimeo., Nov.2005, 26p.
GOMES, F.A.; PAZ, L.S. Estimating the elasticity of intertemporal substitution: is the
aggregate financial return free from the weak instrument problem? Journal of
Macroeconomics, v.36, n.1, p.63-75, Feb.2013 [2013a].
GOMES, F.A.; PAZ, L.S. Large estimates of the elasticity of intertemporal
substitution: is the aggregate return series or the instrument list? Quarto Encontro de
Economia do Espırito Santo (IV EEES). Anais..., Nov.2013, 11p. [2013b].
References
GRUBER, J. A tax-based estimate of the elasticity of intertemporal substitution.
NBER working paper n.11945, Jan.2006, 30p.
HANSEN, Gary D. Indivisible labor and the business cycle. Journal of Monetary
Economics, v.16, n.3, p.309-327, 1985.
HAVRANEK, T.; HORVATH, R.; IRSOVA, Z.; RUSNAK, M. Cross-country
heterogeneity in intertemporal substitution. Charles University, Mimeo., Aug.2013,
39p.
MULLIGAN, C.B. Capital, interest, and aggregate intertemporal substitution. NBER
working paper n.9373, Dec.2002, 45p.
References
MURRAY, M.P. Avoiding invalid instruments and coping with weak instruments.
Journal of Economic Perspectives, v.20, n.4, p.111-132, Fall 2006.
STOCK, J.H.; WRIGHT, J.H.; YOGO, M. A survey of weak instruments and weak
identification in Generalized Method of Moments. Journal of Business & Economic
Statistics, v.20, n.4, p.518-529, Oct.2002.
YOGO, M. Estimating the elasticity of intertemporal substitution when instruments
are weak. Review of Economics and Statistics, v.86, n.4, p.797-810, 2004.
Thank You
Matheus Albergaria de Magalhaes
http://www.sites.google.com/site/malbergariademagalhaes