Abstract
We estimate the intertemporal elasticity of substitution in consumption (IES) using a preannounced increase in Japan’s consumption tax rate. Because this tax is highly comprehensive, the rate increase was announced prior to its implementation, and because other factors that affect the real interest rate were constant, the tax rate increase presents an ideal natural experiment to estimate the IES. A Japanese monthly household survey is exploited to accurately categorize nondurables, and our empirical specification addresses intratemporal substitution bias. We find that the IES is 0.21 and not significantly different from 0, but it is significantly less than 1.
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© 2016 by The President and Fellows of Harvard College and the Massachusetts Institute of Technology. Published under a Creative Commons Attribution = NonCommercial 3.0 Unported (CC BY = NC 3.0) License.
2016
The President and Fellows of Harvard College and the Massachusetts Institute of Technology
This is an open-access article distributed under the terms of the Creative Commons Attribution NonCommercial 3.0 Unported License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. For a full description of the license, please visit https://creativecommons.org/licenses/by/3.0/legalcode