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Elasticity of Intertemporal Substitution: An Investigation in Iran

Author

Listed:
  • Einian, Majid

    (Graduate School of Management and Economics, Sharif University of Technology, Tehran, Iran)

  • Nili, Masoud

    (Graduate School of Management and Economics, Sharif University of Technology, Tehran, Iran)

Abstract

We present estimates of the Elasticity of Intertemporal Substitution (EIS) for Iranian households using synthetic cohort panels based on household micro-data. Results show significant difference with the common values used in Dynamic Stochastic General Equilibrium (DSGE) models which are originally based on estimated values for developed countries. We show that this difference has important theoretical and practical implications. In a simple Real Business Cycle (RBC) setting using the estimated values rather than the common values will help explain 33% more of consumption volatility. We also study the role of EIS in the consumption response to a monetary shock in a Smets & Wouters (2003) model as a benchmark for New-Keynesian monetary models. Results indicate that the monetary policy shock has less impact on consumption in a country with lower elasticity of intertemporal substitution.

Suggested Citation

  • Einian, Majid & Nili, Masoud, 2016. "Elasticity of Intertemporal Substitution: An Investigation in Iran," Journal of Money and Economy, Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran, vol. 11(2), pages 207-223, April.
  • Handle: RePEc:mbr:jmonec:v:11:y:2016:i:2:p:207-223
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    More about this item

    Keywords

    Elasticity of Intertemporal Substitution; Euler Equation; Synthetic Panel;
    All these keywords.

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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