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Intertemporal Substitution and Hyperbolic Discounting

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  • Geraats, P.M.

Abstract

Evidence from behavioural experiments suggests that intertemporal preferences reflect a hyperbolic discount function. This paper shows that in contrast to exponential discounting, the elasticity of intertemporal substitution for hyperbolic consumers depends on the persistence of the change in the intertemporal relative price. In particular, lasting changes in the real interest rate are likely to generate a smaller degree of intertemporal substitution in consumption than temporary changes. This result holds for both sophisticated and naive hyperbolic consumers. It provides a novel testable implication of hyperbolic discounting and a new perspective on intertemporal substitution.

Suggested Citation

  • Geraats, P.M., 2005. "Intertemporal Substitution and Hyperbolic Discounting," Cambridge Working Papers in Economics 0515, Faculty of Economics, University of Cambridge.
  • Handle: RePEc:cam:camdae:0515 Note: Ma
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    More about this item

    Keywords

    Intertemporal substitution; consumption; quasi-hyberbolic discounting;

    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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