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Making the case for a low intertemporal elasticity of substitution

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  • R. Anton Braun
  • Tomoyuki Nakajima

Abstract

We provide two ways to reconcile small values of the intertemporal elasticity of substitution (IES) that range between 0.35 and 0.5 with empirical evidence that the IES is large. We do this reconciliation using a model in which all agents have identical preferences and the same access to asset markets. We also conduct an encompassing test, which indicates that specifications of the model with small values of the IES are more plausible than specifications with a large IES.

Suggested Citation

  • R. Anton Braun & Tomoyuki Nakajima, 2011. "Making the case for a low intertemporal elasticity of substitution," FRB Atlanta Working Paper 2011-13, Federal Reserve Bank of Atlanta.
    • Handle: RePEc:fip:fedawp:2011-13
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    Cited by:

    1. Dominique Pepin, 2014. "Asset Prices and Risk Aversion," Papers 1403.0851, arXiv.org.
    2. Pierre-Richard Agénor & Alessandro Flamini, 2016. "Institutional Mandates for Macroeconomic and Financial Stability," Centre for Growth and Business Cycle Research Discussion Paper Series 231, Economics, The Univeristy of Manchester.
    3. Pierre-Richard Agénor & Pengfei Jia, 2017. "Macroprudential Policy Coordination in a Currency Union'," Centre for Growth and Business Cycle Research Discussion Paper Series 235, Economics, The Univeristy of Manchester.

    More about this item

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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