Alternative specifications for consumption and the estimation of the intertemporal elasticity of substitution

Paul Beaudry and Eric van Wincoop

No 69, Discussion Paper / Institute for Empirical Macroeconomics from Federal Reserve Bank of Minneapolis

Abstract: This paper documents several advantages associated with using state level consumption data to examine consumption behavior and especially to estimate the Intertemporal Elasticity of Substitution (IES). In contrast to the results of Hall (1988) and Campbell and Mankiw (1989), we provide substantial evidence indicating that the IES is significantly different from zero and probably close to one. Since the overidentifying restrictions of the standard Euler equation are generally rejected, we use these data to explore the nature of these rejections and evaluate an alternative specification of consumer behavior proposed by Campbell and Mankiw (1987, 1989, 1990). We take special care of examining the robustness of our results with respect to problems caused by the mismeasurement of the interest rate. In particular, we identify a common time component in expected consumption growth across states which, under the specifications of the theory, should reflect real interest rate movements. We find that the common time component closely matches the expected real return on Treasury bills as should be expected if the IES is different from zero and if the T-bill rate is an appropriate measure of interest rates.

Keywords: Consumption; (Economics) (search for similar items in EconPapers)
Date: 1992
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
http://www.minneapolisfed.org/research/common/pub_detail.cfm?pb_autonum_id=67 (application/pdf)
http://www.minneapolisfed.org/research/DP/DP69.pdf

Related works:
Working Paper: Alternative Specifications for Consumption and the Estimation of the Intertemporal Elasticity of Substitution (1992)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmem:69

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in Discussion Paper / Institute for Empirical Macroeconomics from Federal Reserve Bank of Minneapolis Contact information at EDIRC.
Bibliographic data for series maintained by Jannelle Ruswick ( this e-mail address is bad, please contact ).