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Making the case for a low intertemporal elasticity of substitution

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  • R. Anton Braun
  • Tomoyuki Nakajima

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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File URL: http://www.frbatlanta.org/documents/pubs/wp/wp1113.pdf
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Bibliographic Info

Paper provided by Federal Reserve Bank of Atlanta in its series Working Paper with number 2011-13.

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Date of creation: 2011
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Handle: RePEc:fip:fedawp:2011-13

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