Japan’s intertemporal elasticity of substitution of consumption

ABSTRACT

This study estimates the intertemporal elasticity of substitution (IES) of consumption in Japan, using the latest available data and considering structural changes. Our findings suggest that the IES during the post-bubble economy was greater than what it was until the end of the bubble economy. As a result of an increase in savings as a waiting option in conjunction with a precautionary savings motive, elasticity of intertemporal substitution has increased considerably since the bubble period.

KEYWORDS:

• Intertemporal elasticity of substitution
• consumption
• generalized method of moments
• post-bubble economy

JEL CLASSIFICATION:

• D15
• E2
• E21

Acknowledgment

We are grateful to our supervisor, Professor Kanemi Ban, for his continuous encouragement and guidance as well as financial and technical supports during our studies at Osaka University. We also wish to thank Tamaki Sakura for her valuable comments on data set.

Disclosure statement

No potential conflict of interest was reported by the authors.

Correction Statement

This article has been republished with minor changes. These changes do not impact the academic content of the article.

Notes

¹ Ho (2004) focused on the structural change in 1980 and estimated the Japanese IES estimates for 1961Q1-1980Q4 and 1871Q1-1999Q4. Yamamoto (2013) estimated the Japanese IES estimates for1980Q1-1997Q2 and 1997Q3-2007Q4, considering the structural change by the large scale of monetary easing policy adopted by the Bank of Japan.

² Data based on the 1968 SNA are available only for the period from 1970Q1 to 1994Q1; on the other hand, data based on the 1993 SNA are available only for the period from 1980Q1 to 2010Q1. There is no SNA series that provides data for the entire period from 1970Q1 to 2010Q1. This is why we use both data of 1968 SNA and 1993 SNA.

³ Hansen and Singleton (1982) applied the GMM method to the estimation of Euler equation.

⁴ We also estimate the latest IES in Japan using the latest data based on the 2008 SNA (reference year = 2011, chain-linked) that are available for the period from 1994Q1 to 2019Q1. the IES estimates for 1994Q1–2019Q1 range from 0.475 to 0.607. These values are similar to our IES estimates for 1991Q2–2010Q1. The results show that the IES in the post-bubble Japanese economy is greater than the ISE in the ante-collapse of the bubble economy.

Additional information

Funding

This work was supported by the Grant-in-Aid for Young Scientists (B) [No.15K17054] and the Grant-in-Aid for Scientific Research (C) [No.17K04021] and [No.18K01615] provided by the Japan Society for the Promotion of Science.