Elasticity of Intertemporal Substitution and Unemployment Volatility

2014 ◽  
Author(s):  
Dongweon Lee
Keyword(s):  
Intertemporal Substitution ◽  
Elasticity Of Intertemporal Substitution ◽  
Unemployment Volatility

scholarly journals A Tax-Based Estimate of the Elasticity of Intertemporal Substitution

2013 ◽  
Vol 03 (01) ◽  
pp. 1350001 ◽  
Author(s):  
Jonathan Gruber
Keyword(s):  
Time Series ◽  
Interest Rate ◽  
Interest Rates ◽  
Consumer Expenditure ◽  
Intertemporal Substitution ◽  
Tax Rate ◽  
Elasticity Of Intertemporal Substitution ◽  
Using Data ◽  
The Interest Rate ◽  
The Impact

One of the most important behavioral parameters in macroeconomics is the elasticity of intertemporal substitution (EIS). Starting with the seminal work of Hall (Hall, R., 1978, Stochastic Implications of the Life Cycle — Permanent Income Hypothesis: Theory and Evidence, Journal of Political Economy 86, 971–987), researchers have used an Euler equation framework to estimate the EIS, relating the growth rate of consumption to the after-tax interest rate facing consumers. This large literature has, however, produced very mixed results, perhaps due to an important limitation: The impact of the interest rate on consumption or savings is identified by time-series movements in interest rates. Yet the factors that cause time-series movements in interest rates may themselves be correlated with consumption or savings decisions. I address this problem by using variation across individuals in the capital income tax rate. Conditional on observable characteristics of individuals, tax rate movements cause exogenous shifts in the after-tax interest rate. Using data on total non-durable consumption from the Consumer Expenditure Survey over two decades, I estimate a surprisingly high EIS of two. This finding is robust to a variety of specification checks.

scholarly journals The Nexus Between the Elasticity of Intertemporal Substitution and the Coefficient of Relative Risk Aversion

2018 ◽  
Vol 9 (3) ◽  
pp. 98
Author(s):  
Samih Antoine Azar
Keyword(s):  
Statistical Analysis ◽  
Relative Risk ◽  
Risk Aversion ◽  
Euler Equation ◽  
Multiple Solutions ◽  
Preference Function ◽  
Relative Risk Aversion ◽  
Intertemporal Substitution ◽  
Three Solutions ◽  
Elasticity Of Intertemporal Substitution

One advantage of the Epstein-Zin preference function is that it disentangles the elasticity of intertemporal substitution (EIS) from the coefficient of relative risk aversion (CRRA). The paper subjects this preference function to statistical analysis. The methodology is to calculate the unconditional average of this new Euler equation and to find out if such an average is statistically insignificantly different from zero. Seventeen individual and different stocks are used. The results show that, when the EIS is fixed, the CRRA has multiple solutions. In some cases there are three solutions and not only two. Moreover these solutions extend to wide ranges.

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