Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/120819 
Year of Publication: 
2015
Series/Report no.: 
Staff Report No. 734
Publisher: 
Federal Reserve Bank of New York, New York, NY
Abstract: 
We estimate the elasticity of intertemporal substitution (EIS) - the elasticity of expected consumption growth with respect to variation in the real interest rate - using subjective expectations from the newly released FRBNY Survey of Consumer Expectations (SCE). This dataset is unique, since it includes consumers' expectations of both consumption growth and inflation, with the latter providing subjective variation in ex ante real interest rates. As a result, we can estimate a subjective version of the consumption Euler equation, without having to take a stand on the process of expectation formation. Our main finding is that this subjective EIS is precisely and robustly estimated to be around 0.8 in the general population, consistent with typical macroeconomic calibrations of the Euler equation. However, we find some evidence that the EIS rises to slightly above one for high-income individuals, consistent with the assumptions in asset pricing models featuring long-run risks or rare disasters.
Subjects: 
subjective expectations
inflation expectations
Euler equation
elasticity of intertemporal substitution
JEL: 
D12
D84
E21
Document Type: 
Working Paper

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