Subjective intertemporal substitution

Abstract

Using subjective expectations data from the New York Fed’s Survey of Consumer Expectations (SCE), we estimate the elasticity of intertemporal substitution (EIS)—the response of expected consumption growth to changes in the real interest rate. This unique data set allows us to estimate the consumption Euler equation with no auxiliary assumptions on the properties of expectations, which are instead necessary when using choice data. We find a subjective EIS of about 0.5, consistent with the results of much of the literature. In addition, planned consumption displays excess sensitivity to expected income changes, even among households not facing substantial liquidity constraints.