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Making the Case for a Low Intertemporal Elasticity of Substitution

Author

Listed:
  • R. Anton Braun

    () (Federal Reserve Bank of Atlanta)

  • Tomoyuki Nakajima

    () (Kyoto University)

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. This is done using a model in which all agents have identical preferences and the same access to asset markets. We also conduct an encompassing test. That test 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," KIER Working Papers 788, Kyoto University, Institute of Economic Research.
  • Handle: RePEc:kyo:wpaper:788
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    References listed on IDEAS

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    Cited by:

    1. Dominique Pepin, 2014. "Asset Prices and Risk Aversion," Working Papers hal-00955590, HAL.
    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

    Keywords

    Uncertainty; Intertemporal elasticity of substitution; Risk aversion; Business Cycles; Growth.;

    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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