Intertemporal Substitution in Macroeconomics

N. Gregory Mankiw, Julio Rotemberg and Lawrence H. Summers

The Quarterly Journal of Economics, 1985, vol. 100, issue 1, 225-251

Abstract: Modern neoclassical business cycle theories posit that the observed fluctuations in consumption and employment correspond to decisions of an optimizing representative individual. We estimate three first-order conditions that represent three tradeoffs faced by such an optimizing individual. He can trade off present for future consumption, present for future leisure, and present consumption for present leisure. The aggregate U. S. data lend no support to this model. The overidentifying restrictions are rejected, and the estimated utility function is often convex. Even when it is concave, the estimates imply that either consumption or leisure is an inferior good.

Date: 1985
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Working Paper: Intertemporal Substitution in Macroeconomics (1982)
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