The Elasticity of Intertemporal Substitution Reconsidered

Dladla, Pholile and Malikane, Christopher and Ojah, Kalu (2014): The Elasticity of Intertemporal Substitution Reconsidered.

Abstract

The elasticity of intertemporal substitution (EIS) is a crucial parameter in finance and macroeconomics, yet its estimation remains elusive. We show, based on Fisher's relation and the expectations theory of the term structure, that the EIS is the inverse of the product of the average term to maturity of debt instruments and the consumption-output ratio. Therefore, the EIS need not be estimated but can be calibrated from observable data.

• Item Type: MPRA Paper
• Language: English
• Keywords: Elasticity of intertemporal substitution, Fisher's relation, expectations theory of the term structure.
• Subjects: E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E43 - Interest Rates: Determination, Term Structure, and Effects; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy

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