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Estimating the elasticity of intertemporal substitution taking into account the precautionary savings motive

Fábio Gomes and Priscila Fernandes Ribeiro

Journal of Macroeconomics, 2015, vol. 45, issue C, 108-123

Abstract: This paper estimates the elasticity of intertemporal substitution for U.S. aggregate time series data, taking into account the precautionary savings motive. By making use of a recursive utility function, we estimate an Euler equation, via GMM. This procedure leads consumption growth rate to depend on asset returns, and on a time-varying variance, which captures the precautionary motive. When significant, the elasticity of intertemporal substitution estimates ranges from 0.4 to 1.8, which are higher than most of the results found in the literature. Furthermore, the evidence suggests that consumers react to risk; however, the contribution of precautionary motive to consumption growth seems to be limited.

Keywords: Consumption; Asset returns; Elasticity of intertemporal substitution; Precautionary savings; Nonexpected utility (search for similar items in EconPapers)
JEL-codes: C22 C26 E21 (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:45:y:2015:i:c:p:108-123

DOI: 10.1016/j.jmacro.2015.04.001

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