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- Title
The Intertemporal Elasticity of Substitution: An Exploration using a US Panel of State Data.
- Authors
Beaudry, Paul; van Wincoop, Eric
- Abstract
This paper uses state-level consumption data to estimate the intertemporal elasticity of substitution of consumption (IES). In contrast to the results of J. Campbell and G. Mankiw (1989), it provides evidence indicating that the IES is significantly different from zero and probably close to one. Since inference about the IES in the context of the standard Euler equation is problematic as a result of mis-specification bias, most of our discussion revolve around the context of the framework developed by Campbell and Mankiw. This modifies the Euler equation in that a fraction of agents simply consume their income. The use of panel data to examine the relationship between interest rates and consumption growth has two advantages. First, a significant increase in precision is achieved, which in particular allows one to rule out a zero IES. Second, the panel aspect of the data can be used to bypass asset return measurement problems. In particular, a common time component in expected consumption growth is identified that is associated with movements in interest rates when the IES is positive.
- Subjects
ELASTICITY (Economics); SUBSTITUTION (Economics); CONSUMPTION (Economics); PANEL analysis; CAMPBELL, J.; INTEREST rates
- Publication
Economica, 1996, Vol 63, Issue 251, p495
- ISSN
0013-0427
- Publication type
Article
- DOI
10.2307/2555019