Subjective Intertemporal Substitution
56 Pages Posted: 24 Jul 2015 Last revised: 17 Mar 2019
Date Written: July 1, 2015
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
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