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Intertemporal Substitution in Macroeconomics

Author

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  • N. Gregory Mankiw
  • Julio J. Rotemberg
  • Lawrence H. Summers

Abstract

Modern neoclassical business cycle theories posit that the observed fluctuations in consumption and employment correspond to decisions of an optimizing representative individual. We estimate three first-order conditions that represent three tradeoffs faced by such an optimizing individual. He can trade off present for future consumption, present for future leisure, and present consumption for present leisure. The aggregate U. S. data lend no support to this model. The overidentifying restrictions are rejected, and the estimated utility function is often convex. Even when it is concave, the estimates imply that either consumption or leisure is an inferior good.

Suggested Citation

  • N. Gregory Mankiw & Julio J. Rotemberg & Lawrence H. Summers, 1985. "Intertemporal Substitution in Macroeconomics," The Quarterly Journal of Economics, Oxford University Press, vol. 100(1), pages 225-251.
  • Handle: RePEc:oup:qjecon:v:100:y:1985:i:1:p:225-251.
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    1. Rubinstein, Mark, 1974. "An aggregation theorem for securities markets," Journal of Financial Economics, Elsevier, vol. 1(3), pages 225-244, September.
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