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A life-cycle approach to the intertemporal elasticity of substitution

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  • Biederman, Daniel K.
  • Goenner, Cullen F.
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    Abstract

    We construct a three-period model spanning 30 years of an optimizing consumer's life. Exploiting the first-order conditions, we derive expressions for the intertemporal elasticity of substitution (IES) that allow for different utility specifications; the case of isoelastic utility is a special case. We fit US household data on income, consumption, and net worth to the IES expressions to obtain point estimates of the IES. We also construct 95 percent confidence intervals, based on 10,000 simulated observations. Our evidence suggests that the value of the IES is likely between 0.2 and 0.8.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Macroeconomics.

    Volume (Year): 30 (2008)
    Issue (Month): 1 (March)
    Pages: 481-498

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    Handle: RePEc:eee:jmacro:v:30:y:2008:i:1:p:481-498

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    Web page: http://www.elsevier.com/locate/inca/622617

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    References

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    1. Gourinchas, Pierre-Olivier & Parker, Jonathan A, 2000. "Consumption Over the Life-Cycle," CEPR Discussion Papers 2345, C.E.P.R. Discussion Papers.
    2. Reinhart, Carmen & Ogaki, Masao, 1995. "Measuring intertemporal substitution: The role of durable goods," MPRA Paper 13690, University Library of Munich, Germany.
    3. Jappelli, Tullio, 1990. "Who Is Credit Constrained in the U.S. Economy?," The Quarterly Journal of Economics, MIT Press, vol. 105(1), pages 219-34, February.
    4. Mankiw, N Gregory & Rotemberg, Julio J & Summers, Lawrence H, 1985. "Intertemporal Substitution in Macroeconomics," The Quarterly Journal of Economics, MIT Press, vol. 100(1), pages 225-51, February.
    5. Robert E. Hall, 1988. "Intertemporal Substitution in Consumption," NBER Working Papers 0720, National Bureau of Economic Research, Inc.
    6. Patterson, Kerry D & Pesaran, Bahram, 1992. "The Intertemporal Elasticity of Substitution in Consumption in the United States and the United Kingdom," The Review of Economics and Statistics, MIT Press, vol. 74(4), pages 573-84, November.
    7. repec:fth:harver:1435 is not listed on IDEAS
    8. Carroll, Christopher D. & Samwick, Andrew A., 1997. "The nature of precautionary wealth," Journal of Monetary Economics, Elsevier, vol. 40(1), pages 41-71, September.
    9. Beaudry, Paul & van Wincoop, Eric, 1996. "The Intertemporal Elasticity of Substitution: An Exploration Using a US Panel of State Data," Economica, London School of Economics and Political Science, vol. 63(251), pages 495-512, August.
    10. Orazio P. Attanasio & Guglielmo Weber, 1994. "Is Consumption Growth Consistent with Intertemporal Optimization? Evidence from the Consumer Expenditure Survey," NBER Working Papers 4795, National Bureau of Economic Research, Inc.
    11. Shigeyuki Hamori, 1996. "Consumption growth and the intertemporal elasticity of substitution: some evidence from income quintile groups in Japan," Applied Economics Letters, Taylor & Francis Journals, vol. 3(8), pages 529-532.
    12. John Y. Campbell & N. Gregory Mankiw, 1990. "Consumption, Income, and Interest Rates: Reinterpreting the Time Series Evidence," NBER Working Papers 2924, National Bureau of Economic Research, Inc.
    13. Masasaki Fuse, 2004. "Estimating intertemporal substitution in Japan," Applied Economics Letters, Taylor & Francis Journals, vol. 11(4), pages 267-269.
    14. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834, January.
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    Cited by:
    1. Julien Hugonnier & Florian Pelgrin & Pascal St-Amour, 2010. "A structural analysis of the health expenditures and portfolio choices of retired agents," Swiss Finance Institute Research Paper Series 10-29, Swiss Finance Institute.
    2. Groneck, Max, 2008. "A Golden Rule of Public Finance or a Fixed Deficit Regime? Growth and Welfare Effects of Budget Rules," FiFo Discussion Papers - Finanzwissenschaftliche Diskussionsbeiträge 08-7, University of Cologne, FiFo Institute for Public Economics.
    3. Groneck, Max, 2010. "A golden rule of public finance or a fixed deficit regime?: Growth and welfare effects of budget rules," Economic Modelling, Elsevier, vol. 27(2), pages 523-534, March.

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