Federal Reserve Bank of New York
Subjective intertemporal substitution
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.
Cite this item
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.
- D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
- D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
- D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
- E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
Keywords: subjective expectations; inflation expectations; Euler equation; elasticity of intertemporal substitution
This item with handle RePEc:fip:fednsr:734
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