Intertemporal preference parameters for some European monetary union countries

Abstract

In the European Monetary Union, the estimation and analysis of preference parameters in its members is of special interest because possible differences could help us to understand why a common monetary policy could have different effects on the different economies involved. In this article, we have focused our attention on the elasticity of intertemporal substitution, one of the key preference parameters in intertemporal macroeconomic models. Several studies have shown a possible under-estimation of such elasticity for different countries. It is common practice to estimate the parameter using only nondurable goods and services consumption data, without referring to the flow of services generated by durable consumption. This is only admissible if the intratemporal utility can be separated among the different consumption components. Our first objective is, therefore, to test the assumption of intratemporal separability for a selection of European countries (Germany, Spain and France), and then to analyse the effect of durable consumption on the estimated values of the intertemporal elasticity of substitution of these countries, our ultimate goal. Knowledge of such elasticity will enable us to characterisehow saving in these economies reacts to variations in the real interest rate