Making the Case for a Low Intertemporal Elasticity of Substitution

31 Pages Posted: 22 Mar 2015

See all articles by R. Braun

R. Braun

Federal Reserve Bank of Atlanta

Tomoyuki Nakajima

University of Tokyo

Date Written: January 2012

Abstract

We provide two ways to reconcile small values of the intertemporal elasticity of substitution (IES) that range between 0.35 and 0.5 with empirical evidence that the IES is large. We do this reconciliation using a model in which all agents have identical preferences and the same access to asset markets. We also conduct an encompassing test, which indicates that specifications of the model with small values of the IES are more plausible than specifications with a large IES.

Keywords: uncertainty, intertemporal elasticity of substitution, risk aversion, business cycles, growth

JEL Classification: E21, E32, O41

Suggested Citation

Braun, R. and Nakajima, Tomoyuki, Making the Case for a Low Intertemporal Elasticity of Substitution (January 2012). FRB Atlanta Working Paper 2012-1, Available at SSRN: https://ssrn.com/abstract=2479585 or http://dx.doi.org/10.2139/ssrn.2479585

R. Braun (Contact Author)

Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States

Tomoyuki Nakajima

University of Tokyo ( email )

Yayoi 1-1-1
Bunkyo-ku
Tokyo, Tokyo 113-8657
Japan

HOME PAGE: http://https://sites.google.com/view/tomoyukinakajima/home

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