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Making the Case for a Low Intertemporal Elasticity of Substitution

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  • R. Anton Braun

    ()
    (Federal Reserve Bank of Atlanta)

  • Tomoyuki Nakajima

    ()
    (Kyoto University)

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. This is done using a model in which all agents have identical preferences and the same access to asset markets. We also conduct an encompassing test. That test 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.kier.kyoto-u.ac.jp/DP/DP788.pdf
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Bibliographic Info

Paper provided by Kyoto University, Institute of Economic Research in its series KIER Working Papers with number 788.

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Length: 30pages
Date of creation: Oct 2011
Date of revision:
Handle: RePEc:kyo:wpaper:788

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Keywords: Uncertainty; Intertemporal elasticity of substitution; Risk aversion; Business Cycles; Growth.;

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  10. M. Fatih Guvenen, 2002. "Reconciling Conflicting Evidence on the Elasticity of Intertemporal Substitution: A Macroeconomic Perspective," RCER Working Papers 491, University of Rochester - Center for Economic Research (RCER), revised Mar 2003.
  11. John Geanakoplos & Ana Fostel, 2008. "Leverage Cycles and the Anxious Economy," American Economic Review, American Economic Association, vol. 98(4), pages 1211-44, September.
  12. Tom Krebs, 2003. "Growth and Welfare Effects of Business Cycles in Economies with Idiosyncratic Human Capital Risk," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(4), pages 846-868, October.
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