Intertemporal Substitution in Macroeconomics

60 Pages Posted: 18 Dec 2010 Last revised: 20 Jun 2011

See all articles by N. Gregory Mankiw

N. Gregory Mankiw

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Julio J. Rotemberg

Harvard University, Business, Government and the International Economy Unit (deceased); National Bureau of Economic Research (NBER) (deceased)

Lawrence H. Summers

Harvard University; National Bureau of Economic Research (NBER); Harvard University - Harvard Kennedy School (HKS)

Date Written: June 1982

Abstract

Modern neoclassical theories of the business cycle posit that aggregate fluctuations in consumption and employment are the consequence of dynamic optimizing behavior by economic agents who face no quantity constraint. In this paper, we estimate an explicit model :f this type. In particular, we assume that the observed fluctuations correspond to the decisions of an optimizing representative individual. This individual has a stable utility function which is additively separable over time but not necessarily additively separable in consumption and leisure. We estimate three first order conditions which represent three margins on which the individual is optimizing. He can trade off present consumption for future consumption, present leisure for future leisure and present consumption for present leisure. Our results show that the aggregate U.S. data are extremely reluctant to be characterized by a model of this type. Not only are the overidentifying restrictions statistically rejected but, in addition, the estimated utility function is often not concave. Even when it is concave the estimates imply that either consumption or leisure is an inferior good.

Suggested Citation

Mankiw, N. Gregory and Rotemberg, Julio J. and Summers, Lawrence H., Intertemporal Substitution in Macroeconomics (June 1982). NBER Working Paper No. w0898. Available at SSRN: https://ssrn.com/abstract=1727084

N. Gregory Mankiw (Contact Author)

Harvard University - Department of Economics ( email )

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Julio J. Rotemberg

Harvard University, Business, Government and the International Economy Unit (deceased) ( email )

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United States
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National Bureau of Economic Research (NBER) (deceased)

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Lawrence H. Summers

Harvard University ( email )

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National Bureau of Economic Research (NBER)

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Harvard University - Harvard Kennedy School (HKS) ( email )

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United States

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