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Intertemporal Substitution and Hyperbolic Discounting

Petra Geraats ()

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: Evidence from behavioural experiments suggests that intertemporal preferences reflect a hyperbolic discount function. This paper shows that in contrast to exponential discounting, the elasticity of intertemporal substitution for hyperbolic consumers depends on the persistence of the change in the intertemporal relative price. In particular, lasting changes in the real interest rate are likely to generate a smaller degree of intertemporal substitution in consumption than temporary changes. This result holds for both sophisticated and naive hyperbolic consumers. It provides a novel testable implication of hyperbolic discounting and a new perspective on intertemporal substitution.

Keywords: Intertemporal substitution; consumption; quasi-hyberbolic discounting (search for similar items in EconPapers)
JEL-codes: D91 E21 (search for similar items in EconPapers)
Pages: 32
Date: 2005-04
New Economics Papers: this item is included in nep-exp, nep-ltv and nep-mic
Note: Ma
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Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:0515

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