Working Paper: NBER ID: w1694
Authors: Robert E. Hall
Abstract: One of the important determinants of the response of saving and consumption to the real interest rate is the elasticity of intertemporal substitution. That elasticity can be measured by the response of the rate of change of consumption to changes in the expected real interest rate. A detailed study of data for the twentieth-century United States shows no strong evidence that the elasticity of intertemporal substitution is positive. Earlier studies flnding substantially positive elasticities are shown to suffer from a bias related to the timing of instrumental variables.
Keywords: intertemporal elasticity of substitution; consumption; real interest rates
JEL Codes: D91; E21
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 changes (E21) |
| higher expected real interest rate (E43) | defer consumption (D15) |
| expected real interest rates (E43) | declines in consumption (D12) |