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Elasticity of intertemporal substitution in the euro area

Author

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  • Marenčák, Michal
  • Nghiem, Giang

Abstract

We leverage the unique design of the ECB Consumer Expectations Survey to directly estimate the Elasticity of Intertemporal Substitution (EIS) for the eurozone and its member countries from the consumers’ Euler equation. Our estimates for the euro area fall between 0.7 and 0.8 and remain stable over time after accounting for the excess sensitivity of planned consumption to expected income changes. Excess income sensitivity was particularly strong during the pandemic years but overall it is much less pronounced in the euro area than in the U.S. We also document substantial heterogeneity in both the EIS and excess income sensitivity across eurozone countries. The implications are discussed.

Suggested Citation

  • Marenčák, Michal & Nghiem, Giang, 2025. "Elasticity of intertemporal substitution in the euro area," Journal of Economic Behavior & Organization, Elsevier, vol. 229(C).
    • Handle: RePEc:eee:jeborg:v:229:y:2025:i:c:s016726812400461x
    DOI: 10.1016/j.jebo.2024.106847
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    More about this item

    Keywords

    Inflation; Expectations; Consumption; Intertemporal elasticity of substitution; Euler equation; Consumer Expectations Survey;
    All these keywords.

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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