Premium
The cross‐Euler equation approach to intertemporal substitution in import demand
Author(s) -
Nishiyama ShinIchi
Publication year - 2005
Publication title -
journal of applied econometrics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.878
H-Index - 99
eISSN - 1099-1255
pISSN - 0883-7252
DOI - 10.1002/jae.816
Subject(s) - dilemma , euler equations , economics , econometrics , substitution (logic) , elasticity of substitution , structural equation modeling , consumption (sociology) , elasticity of intertemporal substitution , euler's formula , microeconomics , mathematics , computer science , statistics , production (economics) , mathematical analysis , social science , geometry , sociology , growth model , programming language
This paper addresses the empirical dilemma in identifying and estimating the parameters governing the intertemporal elasticity of substitution (IES) for import demand. We propose a new concept, the cross‐Euler equation, for overcoming this empirical dilemma. IES parameters are estimated by exploiting the cointegrating restriction implied by the cross‐Euler equation. Further, by comparing the IES estimates from the cross‐Euler equation to those from the standard Euler equation, we test the hypothesis whether import demand is affected by nuisance factors. Using the US data, we found imported goods consumption to be robust against nuisance factors, but not for domestic goods. Copyright © 2005 John Wiley & Sons, Ltd.