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Large Estimates Of The Elasticity Of Intertemporal Substitution: Is It The Aggregate Return Series Or The Instrument List?

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  • FÁBIO AUGUSTO REIS GOMES
  • LOURENÇO S. PAZ

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.
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Suggested Citation

  • Fábio Augusto Reis Gomes & Lourenço S. Paz, 2016. "Large Estimates Of The Elasticity Of Intertemporal Substitution: Is It The Aggregate Return Series Or The Instrument List?," Anais do XLII Encontro Nacional de Economia [Proceedings of the 42nd Brazilian Economics Meeting] 030, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].
    • Handle: RePEc:anp:en2014:030
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    More about this item

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables

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