Large estimates of the elasticity of intertemporal substitution: Is it the aggregate return series or the instrument list?

Fábio Gomes, Lourenço Paz

Research output: Contribution to journalArticle

Abstract

Since the 1980s, researchers have been puzzled by close to zero estimates of the elasticity of intertemporal substitution. Two possible causes are rates of return that are not representative of the agent's portfolio return and inconsistent estimates due to the weak instrument problem. We examine if the aggregate capital return series for the United States and several instrument sets can provide large estimates of this elasticity. Our findings indicate that this return series leads to large estimates of the elasticity using different instrument sets. An unusual set of instruments performed well and its use in consumption-model estimates seems promising.

Original languageEnglish (US)
Pages (from-to)168-181
Number of pages14
JournalEconomics Bulletin
Volume35
Issue number1
StatePublished - Jan 1 2015

ASJC Scopus subject areas

  • Economics, Econometrics and Finance(all)

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