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| Author: | Crossley, T.F. Low, H.W. |
| Title: | Is the elasticity of intertemporal substitution constant? |
| Journal: | Journal of the European Economic Association
2011 : FEB, VOL. 9:1, p. 87-105 |
| Index terms: | elasticity of demand prices budget interest rates econometric models demand |
| Language: | eng |
| Abstract: | All common inter-temporal allocation models assuming constant elasticity of intertemporal substitution (EIS) cause surprising limitations on within-period budget allocations. Hence, the constant EIS assumption can be tested with demand data. Actually, the EIS is pinned down completely by the shape of Engel curves: if the EIS is constant then it can be estimated without variation in the interest rate. That a price elasticity can be estimated without variation in the relevant price indicates how strong the constant EIS assumption is. The assumption of constant EIS is rejected by demand data. |
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