Estimating Intertemporal Elasticity of Substitution in a Sticky Price Model

30 Pages Posted: 10 Jul 2013

See all articles by Juha Kilponen

Juha Kilponen

Bank of Finland - Research

Jouko Vilmunen

Bank of Finland, Research Unit

Oskari Vahamaa

University of Turku

Date Written: May 27, 2013

Abstract

Cancellation of income and substitution effect implied by King-Plosser-Rebelo (1988) preferences breaks tight coefficient restriction between the slope of the Phillips curve and the elasticity of consumption with respect to real interest rate in a sticky price macro model. This facilitates the estimation of intertemporal elasticity of substitution using full information Bayesian Maximum Likelihood techniques within a structural model. The US data from the period 1984–2007 supports low intertemporal elasticity of substitution and strongly rejects a logarithmic and an additively separable utility specification commonly applied in the New Keynesian literature.

Keywords: monetary policy, Bayesian estimation, non-separable utility

JEL Classification: E32, E52, E21

Suggested Citation

Kilponen, Juha and Vilmunen, Jouko and Vahamaa, Oskari, Estimating Intertemporal Elasticity of Substitution in a Sticky Price Model (May 27, 2013). Bank of Finland Research Discussion Paper No. 9/2013. Available at SSRN: https://ssrn.com/abstract=2291392 or http://dx.doi.org/10.2139/ssrn.2291392

Juha Kilponen (Contact Author)

Bank of Finland - Research ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland
+358 10 831 2847 (Phone)
+358 10 831 2294 (Fax)

HOME PAGE: http://www.bof.fi/en/suomen_pankki/organisaatio/asiantuntijoita/kilponen_juha/

Jouko Vilmunen

Bank of Finland, Research Unit ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland

Oskari Vahamaa

University of Turku ( email )

Turku, 20014
Finland

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