Intertemporal substitution in import demand and habit formation

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 di erent parameters is investigated, both in the long and the short-run. Habit formation turns out to be an important factor of import demand. JEL Classi cation numbers: F41, D12 We would like to thank Eric Dor, Fran cois Langot, Franz Palm, Daniel Weiserbs and the participants to the HCM workshop in Aarhus and to the 1995 Annual Meeting of the European Economic Association in Prague for helpful comments and discussion. We also thank Janet Ceglowski for making her data available to us. 1 National Fund for Scienti c Research (Belgium) and University of Louvain, Department of Economics, Place Montesquieu 3, B-1348 Louvain-la-Neuve, E-Mail: [email protected]. This research has been supported by a grant \actions de recherche concert ees" 93/98-162 of the Ministery of scienti c research (Belgian French speaking community). 2 University of Limburg, Department of Quantitative Economics, P.O. Box 616, 6200 MD Maastricht, The Netherlands, E-Mail: [email protected].