Elasticity of Intertemporal Substitution in Consumption: Empirical Evidence from a Natural Experiment

25 Pages Posted: 8 Sep 2010

See all articles by Mudit Kapoor

Mudit Kapoor

Indian School of Business

Shamika Ravi

Brookings Institution

Date Written: August 31, 2010

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. Using a difference in difference approach we compare the total consumption expenditure of households whose oldest living member is 60 or 61 years old with households whose oldest living member is 59 or 58 years old, before and after the policy change. We find the estimate of sigma to be equal to approx 2.2.

Keywords: elasticity of intertemporal substitution in consumption, household consumption expenditure, natural experiment

JEL Classification: C99, D91, D92, E00, E21, E40, E62, H31

Suggested Citation

Kapoor, Mudit and Ravi, Shamika, Elasticity of Intertemporal Substitution in Consumption: Empirical Evidence from a Natural Experiment (August 31, 2010). Available at SSRN: https://ssrn.com/abstract=1673140 or http://dx.doi.org/10.2139/ssrn.1673140

Mudit Kapoor

Indian School of Business ( email )

Hyderabad, Gachibowli 500 019
India

Shamika Ravi (Contact Author)

Brookings Institution ( email )

1775 Massachusetts Ave, NW
Washington, DC 20036
United States

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