intertemporal elasticity of substitution in consumption in the US and the UK by K. D. Patterson

Cover of: intertemporal elasticity of substitution in consumption in the US and the UK | K. D. Patterson

Published by University of Reading, Department of Economics in Reading .

Written in English

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Statementby K.D. Patterson and B. Pesaran.
SeriesDiscussion papers in quantitative economics and computing. Series E Vol.1 (1992/93) / University of Reading -- No.1
ContributionsPesaran, Bahram., University of Reading. Department of Economics.
ID Numbers
Open LibraryOL13876891M

Download intertemporal elasticity of substitution in consumption in the US and the UK

Elasticity of intertemporal substitution (or intertemporal elasticity of substitution) is a measure of responsiveness of the growth rate of consumption to the real interest rate. If the real rate rises, current consumption may decrease due to increased return on savings; but current consumption may also increase as the household decides to consume more immediately, as it is feeling richer.

Intertemporal Rate of Substitution. The intertemporal rate of substitution is a concept in finance that helps us to link the long-term growth rate of the economy, investors’ expectations of future consumption, and interest rate to each other. the reason these are interlinked is because investors trade-off between real consumption today and real consumption in the future.

One of the important determinants of the response of saving and consumption to the real interest rate is the elasticity of intertemporal substitution.

That elasticity can be measured by the response of the rate of change of consumption to changes in the expected real interest rated. A detailed study of data for the twentieth-century United Cited by: Downloadable (with restrictions).

As Robert E. Hall () notes, the magnitude of the intertemporal elasticity of substitution in consumption is "one of the central questions of macroeconomics." Do higher expected real interest rates lead to deferred consumption.

The authors extend Hall's methodology and model, and compare results for the United Sta tes and the United Kingdom. The elasticity of intertemporal substitution (EIS) measures the willingness on the part of the consumer to substitute future consumption for present consumption.

It plays a key role in the theory of consumption and saving, in particular in the life-cycle version of that theory. This paper estimates the elasticity of intertemporal substitution in consumption (σ) by exploiting a natural experiment provided by a change in the Indian banking legislation.

The new legislation authorized banks to offer higher interest rates on deposits to citizens above 60 years of age. "The Intertemporal Elasticity of Substitution: An Exploration Using a US Panel of State Data," Economica, London School of Economics and Political Science, vol.

63(), pagesAugust. Hall, Robert E, "Intertemporal Substitution in Consumption," Journal of Political Economy, University of Chicago Press, vol.

96(2), pages economic models this response is governed by the Elasticity of Intertemporal Substitution (EIS). The EIS is arguably one of the most important parameters in economics as it plays a central role for a range of questions in macro, public finance, household finance, and asset pricing. states on intertemporal consumption allocations in the UK FES.

However, their analysis was conditional on labour market behaviour and, although being ‘Even the Panel Study for Income Dynamics in the US, for which consumption data are available. This dissertation intertemporal elasticity of substitution in consumption in the US and the UK book the elasticity of intertemporal substitution (EIS) of con-sumption using the Nielsen Consumer Panel.

The Nielsen Consumer Panel is built from transactional data that follows households in the United States and their grocery purchases from to Because of the transactional nature of the dataset, there is a. Estimating the elasticity of intertemporal substitution accounting for stockholder-specific portfolios.

Applied Economics Letters: Vol. 24, No. 13, pp. The elasticity of intertemporal substitution (EIS) is an important number in macroeconomic theory. It measures the willingness on the part of the consumer to substitute future consumption for present consumption. This parameter plays a key role in the theory of consumption and saving, in particular in the life-cycle version of that theory.

In this paper we show that both the qualitative and quantitative properties of the model in terms of Balanced Growth Path fertility choice are highly sensitive to the choice of intertemporal elasticity of substitution in consumption (IES). paring the consumption ratio CZ/CI at point F and G reveals that consumption grows faster when the indifference curve is more elastic.

Thus, there is a positive relationship between the intertemporal elasticity of substitution and the elasticity of the indifference curve. Now, suppose an. After accounting for time aggregation and other problems, consumption growth is only very poorly predictable.

Lining up the small movements in expected consumption growth against large movements in real interest rates, we see a small intertemporal substitution elasticity, or a. elasticity of where 1/σ is the intertemporal elasticity of substitution in consumption, a key Cited by 3 - Related articles - View as HTML - BL Direct - All 12 versions Labor supply response in macroeconomic models: Assessing the empirical validity of the intertemporal labor supply response from a stochastic overlapping.

In postwar data for the United States, expected real returns have declined over time in the stock market and for savings accounts. Over the same period, the rate of growth of consumption has been almost steady.

The paper concludes that intertemporal substitution is weak, for if it were strong, the growth rate of consumption would have declined. Abstract. This paper estimates the elasticity of intertemporal substitution in consumption (sigma).

We exploit a natural experiment provided by a change in the Indian banking legislation which authorized all the deposit collecting institutions to offer a higher interest rate on deposits to citizens above 60 years of age. The rate of time preference (RTP) and the intertemporal elasticity of substitution (IES) are two important factors shaping intertemporal consumption decisions.

Models in. This research empirically analysed the relations between the difference in consumer's preference and the consumption growth rate in Japan. As a result, the close relationship between the two is revealed. This study has clarified the fact that as the income bracket becomes higher, the value of intertemporal elasticity of substitution becomes.

a difference of households' attitude with respect to intertemporal substitution of consumption, then the high saving rate implies that Japan's intertemporal substitution is stronger than that of the United States, and of most other countries.

In other words, the applicability of the US-data-based debate may be limited. However, as Hayashi (   If you need immediate assistance, call SSRNHelp ( ) in the United States, or +1 outside of the United States, AM to PM U.S. Eastern, Monday - Friday. Submit a Paper.

Parameter ρ>0 is the instantaneous time-preference rate, 0consumption in households’ utility, relative to public consumption, and σ is the reciprocal of the intertemporal elasticity of substitution for consumption.

We assume 1 − σ. We estimate the intertemporal elasticity of substitution in consumption (IES) using a preannounced increase in Japan’s consumption tax rate.

Because this tax is highly comprehensive, the rate increase was announced prior to its implementation, and because other factors that affect the real interest rate were constant, the tax rate increase. The Intertemporal Elasticity of Substitution: An Exploration using a US Panel of State Data By PAUL BEAUDRY* and ERIC VAN WINCOOP * University of British Columbia, CIAR and NBER.

t Boston University Final version received 5 December This paper uses state-level consumption data to estimate the intertemporal elasticity of substitution of.

About Us Learn more about Stack Overflow the company How to derive elasticity of substitution. The first step is to recall the definition of a differential. About intertemporal elasticity of substitution. Estimating the Intertemporal Substitution Elasticity Introduction The Elasticity of Intertemporal Substitution (eis), a key parameter in macro-economics and nance, measures the sensitivity of expected consumption growth to the real interest rate (ie the expected real return on a nominally risk-free asset).

In the case of time-additive utility the. Implicatoin: If intertemporal preferences are additive, the EIS is constant, and within period preferences are not homothetic, then the intertemporal preference parameter is identified by the curvature of Engel curves.

Using Roy’s identity: 1 1 1 ()(1 1/) log 1 () kk k kk k ab wx ap ap ab wx ap ap θ. We de fine the elasticity of intertemporal substitution (EIS) as the derivative of log total ex- penditure with respect to the log of the intertemporal price (that is, the interest rate) holding within-period relative prices and the discounted marginal utility of expenditure constant.

2 It is well. For example, by adopting a general constant elasticity of substitution (CES) technology, Pintus () finds that with large enough the elasticity of capital–labor substitution (in the range of [, ]), the elasticity of intertemporal substitution in consumption (in the range of [, 25]) as well as the elasticity of labor supply.

INTERTEMPORAL SUBSTITUTION IN MACROECONOMICS of consumption for leisure. This is analogous to some of the pro- cedures used in this paper.

In recent papers MaCurdy [a,bl examines intertemporal substitution effects at the microeconometric level. It might at first seem that micro data provide a much firmer basis for estimating. In general “elasticity of a with respect of b” means the relative change in a over a relative change in b: [math]e = \frac {relative ~change~ in~ a}{relative~ change~ in~ b}[/math] It tells you how much something change percent when you change the.

This article examines the relationship between two types of preference: preference of intertemporal choices and preference towards risk. In the simplest form of the constant relative risk aversion utility function, the intertemporal elasticity of substitution (IES) and risk aversion have an inverse relationship.

The intertemporal elasticity of substitution (σ Lu) measures the responsiveness of the composition of a household's current and future demand for the composite consumption good to relative. Making the Case for a Low Intertemporal Elasticity of Substitution R.

Anton Braun and Tomoyuki Nakajima Working Paper January Abstract: We provide two ways to reconcile small values of the intertemporal elasticity of substitution (IES) that range between and with empirical evidence that the IES is large.

Well yes, intertemporal elasticity of substitution can take negative value. Suppose that the real interest rate rises but the individual forego it for his next generation, to leave bequests. David Cashin and Takashi Unayama, Measuring Intertemporal Substitution in Consumption: Evidence from a VAT Increase in Japan, Review of Economics and Statistics, 98, 2, (), ().

Crossref Julian Thimme, Intertemporal Substitution in Consumption: A Literature Review, SSRN Electronic Journal, /ssrn, (). We collect 2, estimates of the elasticity of intertemporal substitution in consumption from published studies that cover countries during different time periods.

The estimates vary substantially from country to country, even after controlling for 30 aspects of study design. The intertemporal elasticity of substitution between dates i and j is an evaluation of 2.

This is straightforward to interpret. Compute the percentage change in the ratio of marginal utility at i and j that one percent change in the ratio of consumption at the same dates lead to. The inverse of the number is the intertemporal elasticity of. for the intertemporal elasticity of substitution in mind, this paper demonstrates that by adding a degree of sector-speciflc external efiects and/or depreciation to the human capital sector, the two-sector model can be made consistent with high rates of intertemporal elasticity of substitution and high rates of natural population growth.

Abstract. This paper documents several advantages associated with using state level consumption data to examine consumption behavior and especially to estimate the Intertemporal Elasticity of Substitution (IES).the elasticity of intertemporal substitution is sensitive to the duration of the intertemporal price change is a novel theoretical finding that has important implications for the effects of macroeconomic policy.

Intuitively, the intertemporal substitution of consumption depends on the difference be.In this paper, we estimate the intertemporal elasticity of substitution in consumption (IES) using a rate increase in the Japanese Consumption Tax as a natural experiment.

The Consumption Tax, which is a Value Added Tax (VAT), increased from three to five percent in April Unlike.

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