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Real Interest and Consumption

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  • Robert E. Hall

Abstract

One of the important determinants of the response of saving and consumption to the real interest rate is the elasticity of intertemporal substitution. That elasticity can be measured by the response of the rate of change of consumption to changes in the expected real interest rate. A detailed study of data for the twentieth-century United States shows no strong evidence that the elasticity of intertemporal substitution is positive. Earlier studies flnding substantially positive elasticities are shown to suffer from a bias related to the timing of instrumental variables.

Suggested Citation

  • Robert E. Hall, 1985. "Real Interest and Consumption," NBER Working Papers 1694, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:1694
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    1. Barro, Robert J & Sahasakul, Chaipat, 1986. "Average Marginal Tax Rates from Social Security and the Individual Income Tax," The Journal of Business, University of Chicago Press, vol. 59(4), pages 555-566, October.
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    1. repec:hal:spmain:info:hdl:2441/8686 is not listed on IDEAS
    2. Weil, Philippe, 1989. "The equity premium puzzle and the risk-free rate puzzle," Journal of Monetary Economics, Elsevier, vol. 24(3), pages 401-421, November.
    3. John Y. Campbell, Robert J. Shiller, 1988. "The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors," The Review of Financial Studies, Society for Financial Studies, vol. 1(3), pages 195-228.
    4. Martin Feldstein, 1995. "The Effect of a Consumption Tax on the Rate of Interest," NBER Working Papers 5397, National Bureau of Economic Research, Inc.
    5. Lawrence H. Goulder & Barry Eichengreen, 1992. "Trade Liberalization in General Equilibrium: Intertemporal and Inter-industry Effects," Canadian Journal of Economics, Canadian Economics Association, vol. 25(2), pages 253-280, May.
    6. N. Gregory Mankiw, 1987. "Consumer Spending and the After-Tax Real Interest Rate," NBER Chapters, in: The Effects of Taxation on Capital Accumulation, pages 53-68, National Bureau of Economic Research, Inc.
    7. Hausman, Jerry A & Poterba, James M, 1987. "Household Behavior and the Tax Reform Act of 1986," Journal of Economic Perspectives, American Economic Association, vol. 1(1), pages 101-119, Summer.
    8. Barsky, Robert B, 1989. "Why Don't the Prices of Stocks and Bonds Move Together?," American Economic Review, American Economic Association, vol. 79(5), pages 1132-1145, December.
    9. Kochov, Asen, 2018. "A behavioral definition of unforeseen contingencies," Journal of Economic Theory, Elsevier, vol. 175(C), pages 265-290.
    10. Skinner, Jonathan, 1988. "The welfare cost of uncertain tax policy," Journal of Public Economics, Elsevier, vol. 37(2), pages 129-145, November.
    11. Richard Kihlstrom & Christian Gollier, 2016. "Early resolution of uncertainty and asset prices," 2016 Meeting Papers 475, Society for Economic Dynamics.
    12. Moresi, Serge, 1999. "Uncertain lifetime, risk aversion and intertemporal substitution," Economics Letters, Elsevier, vol. 62(2), pages 207-212, February.
    13. Serge Nadeau & Robert P. Strauss, 1991. "Tax Policies and the Real and Financial Decisions of the Firm: the Effects of the Tax Reform Act of 1986," Public Finance Review, , vol. 19(3), pages 251-292, July.
    14. Lawrence H. Goulder, 1989. "Tax Policy, Housing Prices, and Housing Investment," NBER Working Papers 2814, National Bureau of Economic Research, Inc.
    15. Yoshiko Kuwahara & Yasushi Ohkusa, 1996. "An alternative estimation method for the OCE model," Applied Economics Letters, Taylor & Francis Journals, vol. 3(8), pages 501-503.

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