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Federal Reserve Bank of New York
Staff Reports
Subjective intertemporal substitution
Richard K. Crump
Stefano Eusepi
Andrea Tambalotti
Giorgio Topa
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 about 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 based on microeconomic data and supportive of typical macroeconomic calibrations. We also uncover strong evidence of excess sensitivity of planned consumption growth to expected income changes, even among households that are unlikely to be liquidity constrained.


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Richard K. Crump & Stefano Eusepi & Andrea Tambalotti & Giorgio Topa, Subjective intertemporal substitution, Federal Reserve Bank of New York, Staff Reports 734, 01 Jul 2015, revised 01 Mar 2019.
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Keywords: subjective expectations; inflation expectations; Euler equation; elasticity of intertemporal substitution
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