Subjective Intertemporal Substitution

RePEc Short ID: pcr107
ORCID iD: 0000-0002-7958-1818

Crump, Richard K.; Eusepi, Stefano; Tambalotti, Andrea; Topa, Giorgio

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Subjective Intertemporal Substitution

Abstract: We estimate the elasticity of intertemporal substitution (EIS)—the response of expected consumption growth to changes in the real interest rate—using subjective expectations data from the New York Fed’s Survey of Consumer Expectations (SCE). This unique data set allows us to estimate the consumption Euler equation with no auxiliary assumptions on the properties of expectations, which are instead necessary when using choice data. We ﬁnd a subjective EIS of about 0.5, consistent with the results of much of the literature. In addition, planned consumption displays excess sensitivity to expected income changes, even among households not facing substantial liquidity constraints.

Keywords: inflation expectations; elasticity of intertemporal substitution; Euler equation; subjective expectations;

JEL Classification: D12; D15; D84; E21;