Intertemporal Substitution in Import Demand and Habit Formation

Abstract

To study non-durable import demand, we extend previous work done by Clarida (1994) and Ceglowski (1991) by considering a two-good version of the life cycle model in which we introduce time-nonseparability in the households' preferences. The model is estimated using quarterly data for US and France. Using the information contained in the observed stochastic and deterministic trends, we derive a cointegration restriction used to estimate curvature parameters of the instantaneous utility function. The remaining parameters are estimated in a second step by GMM. The constancy of the different parameters is investigated, both in the long and the short-run. Habit formation turns out to be an important factor of import demand.Imports; Habit formation; Inter-temporal Substitution; cointegration; GMM