Intertemporal Substitution in Macroeconomics: Consumption, Labor Supply, and Money Demand

Abstract

This paper introduces money into the consumption-leisure based intertemporal substitution model. The optimization problem poses that the household chooses consumption, labor supply, money demand, and wealth. Holdings of real money balances along with consumption and leisure determine utility. The constant decomposes wealth into money and an alternative asset. The authors estimate the derived semireduced-form equations using per capita U.S. data. The findings indicate significant interest-rate intertemporal substitution in labor supply, but weak effects in consumption and money demand. The empirical evidence supports contemporaneous nonseparability of consumption, money, and leisure within a well-behaved underlying utility function. Copyright 1992 by MIT Press.