Working Paper

Making the case for a low intertemporal elasticity of substitution


Abstract: We provide two ways to reconcile small values of the intertemporal elasticity of substitution (IES) that range between 0.35 and 0.5 with empirical evidence that the IES is large. We do this reconciliation using a model in which all agents have identical preferences and the same access to asset markets. We also conduct an encompassing test, which indicates that specifications of the model with small values of the IES are more plausible than specifications with a large IES.

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Bibliographic Information

Provider: Federal Reserve Bank of Atlanta

Part of Series: FRB Atlanta Working Paper

Publication Date: 2012

Number: 2012-01