Estimating intertemporal elasticity of substitution in a sticky price model

Juha Kilponen, Jouko Vilmunen and Oskari Vähämaa

No 9/2013, Bank of Finland Research Discussion Papers from Bank of Finland

Abstract: Cancellation of income and substitution effect implied by King-Plosser-Rebelo (1988) preferences breaks tight coefficient restriction between the slope of the Phillips curve and the elasticity of consumption with respect to real interest rate in a sticky price macro model. This facilitates the estimation of intertemporal elasticity of substitution using full information Bayesian Maximum Likelihood techniques within a structural model. The US data from the period 1984 - 2007 supports low intertemporal elasticity of substitution and strongly rejects a logarithmic and an additively separable utility specification commonly applied in the New Keynesian literature.

Keywords: Monetary policy; Bayesian estimation; Non-separable utility (search for similar items in EconPapers)
JEL-codes: E21 E32 E52 (search for similar items in EconPapers)
Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bofrdp:rdp2013_009

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