Estimating the Elasticity of Intertemporal Substitution Using Mortgage Notches

Michael Best, James Cloyne, Ethan Ilzetzki and Henrik Kleven

No 13104, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Using a novel source of quasi-experimental variation in interest rates, we develop a new approach to estimating the Elasticity of Intertemporal Substitution (EIS). In the UK, the mortgage interest rate features discrete jumps -- notches -- at thresholds for the loan-to-value (LTV) ratio. These notches generate large bunching below the critical LTV thresholds and missing mass above them. We develop a dynamic model that links these empirical moments to the underlying structural EIS. The average EIS is small, around 0.1, and quite homogeneous in the population. This finding is robust to structural assumptions and can allow for uncertainty, a wide range of risk preferences, portfolio reallocation, liquidity constraints, present bias, and optimization frictions. Our findings have implications for the numerous calibration studies that rely on larger values of the EIS.

JEL-codes: D14 E21 E43 H31 (search for similar items in EconPapers)
Date: 2018-08
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (13)

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Related works:
Journal Article: Estimating the Elasticity of Intertemporal Substitution Using Mortgage Notches (2020)
Working Paper: Estimating the elasticity of intertemporal substitution using mortgage notches (2020)
Working Paper: Estimating the Elasticity of Intertemporal Substitution Using Mortgage Notches (2018)
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