Working Paper: NBER ID: w8896
Authors: Annette Vissing-Jorgensen
Abstract: The paper presents empirical evidence based on the US Consumer Expenditure Survey that accounting for limited asset market participation is important for estimating the elasticity of intertemporal substitution (EIS). Differences in estimates of the EIS between assetholders and non-assetholders are large and statistically significant. This is the case whether estimating the EIS based on the Euler equation for stock index returns or the Euler equation for T-bills, in each case distinguishing between assetholders and non-assetholders as best possible. Estimates of the EIS are around 0.3-0.4 for stockholders and around 0.8-1 for bondholders, and are larger for households with larger asset holdings within these two groups.
Keywords: elasticity of intertemporal substitution; limited asset market participation; US consumer expenditure survey
JEL Codes: E21; G11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| limited asset market participation (G19) | consistent estimates of the elasticity of intertemporal substitution (EIS) (D15) |
| asset return changes (G11) | consumption growth for assetholders (E21) |
| nonassetholders (G39) | biased EIS estimates (C51) |
| EIS estimates for nonassetholders (G19) | insignificantly different from zero (C20) |
| asset market participation (G19) | consumption growth responses to interest rate changes (E20) |
| assetholders (D14) | robust EIS estimates (C51) |