Elasticity of intertemporal substitution in the euro area

Michal Marenčák and Giang Nghiem

Journal of Economic Behavior & Organization, 2025, vol. 229, issue C

Abstract: We leverage the unique design of the ECB Consumer Expectations Survey to directly estimate the Elasticity of Intertemporal Substitution (EIS) for the eurozone and its member countries from the consumers’ Euler equation. Our estimates for the euro area fall between 0.7 and 0.8 and remain stable over time after accounting for the excess sensitivity of planned consumption to expected income changes. Excess income sensitivity was particularly strong during the pandemic years but overall it is much less pronounced in the euro area than in the U.S. We also document substantial heterogeneity in both the EIS and excess income sensitivity across eurozone countries. The implications are discussed.

Keywords: Inflation; Expectations; Consumption; Intertemporal elasticity of substitution; Euler equation; Consumer Expectations Survey (search for similar items in EconPapers)
JEL-codes: D12 D15 D84 E21 (search for similar items in EconPapers)
Date: 2025
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Working Paper: Elasticity of Intertemporal Substitution in the Euro Area (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:229:y:2025:i:c:s016726812400461x

DOI: 10.1016/j.jebo.2024.106847

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