Working Paper: NBER ID: w0720
Authors: Robert E. Hall
Abstract: Does a higher real interest rate induce significant postponement of consumption? According to the theory developed here, this question can be answered by studying the relation between the rate of growth of consumption and expected real interest rates. In postwar data for the United States, expected real returns have declined over time in the stock market and for savings accounts. Over the same period, the rate of growth of consumption has been almost steady. The paper concludes that intertemporal substitution is weak, for if it were strong, the growth rate of consumption would have declined.
Keywords: intertemporal substitution; real interest rates; consumption
JEL Codes: E21; E43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| expected real interest rates (E43) | consumption growth (E20) |
| intertemporal substitution in consumption is weak (D15) | consumption growth (E20) |
| expected real interest rates (E43) | elasticity of intertemporal substitution (D15) |