Staff Reports
Subjective Intertemporal Substitution
July 2015 Number 734
Revised March 2019
JEL classification: D12, D15, D84, E21

Authors: Richard K. Crump, Stefano Eusepi, Andrea Tambalotti, and Giorgio Topa

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 on 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.
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