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A life-cycle approach to the intertemporal elasticity of substitution

  • Biederman, Daniel K.
  • Goenner, Cullen F.
Registered author(s):

    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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    File URL: http://www.sciencedirect.com/science/article/B6X4M-4NVK1PB-1/1/abad820f480eed996c240a2c77b35899
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    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
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622617

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    13. Runkle, David E., 1991. "Liquidity constraints and the permanent-income hypothesis : Evidence from panel data," Journal of Monetary Economics, Elsevier, vol. 27(1), pages 73-98, February.
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