Subjective Intertemporal Substitution

56 Pages Posted: 24 Jul 2015 Last revised: 17 Mar 2019

See all articles by Richard K. Crump

Richard K. Crump

Federal Reserve Banks - Federal Reserve Bank of New York

Stefano Eusepi

University of Texas at Austin

Andrea Tambalotti

Federal Reserve Bank of New York

Giorgio Topa

Federal Reserve Bank of New York

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 about 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 based on microeconomic data and supportive of typical macroeconomic calibrations. We also uncover strong evidence of excess sensitivity of planned consumption growth to expected income changes, even among households that are unlikely to be liquidity constrained.

Keywords: subjective expectations, inflation expectations, Euler equation, elasticity of

JEL Classification: D12, D15, D84, E21

Suggested Citation

Crump, Richard K. and Eusepi, Stefano and Tambalotti, Andrea and Topa, Giorgio, Subjective Intertemporal Substitution (July 1, 2015). FRB of New York Staff Report No. 734. Available at SSRN: https://ssrn.com/abstract=2635008 or http://dx.doi.org/10.2139/ssrn.2635008

Richard K. Crump (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Stefano Eusepi

University of Texas at Austin ( email )

2317 Speedway
Austin, TX 78712
United States

Andrea Tambalotti

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Giorgio Topa

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

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