Subjective Intertemporal Substitution
70 Pages Posted: 24 Jul 2015 Last revised: 12 Aug 2021
Date Written: July 1, 2015
Abstract
We estimate the elasticity of intertemporal substitution (EIS)—the response of expected consumption growth to changes in the real interest rate—using subjective expectations data from the New York Fed’s Survey of Consumer Expectations (SCE). This unique data set allows us to estimate the consumption Euler equation with no auxiliary assumptions on the properties of expectations, which are instead necessary when using choice data. We find a subjective EIS of about 0.5, consistent with the results of much of the literature. In addition, planned consumption displays excess sensitivity to expected income changes, even among households not facing substantial liquidity constraints.
Keywords: subjective expectations, inflation expectations, Euler equation, elasticity of
JEL Classification: D12, D15, D84, E21
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