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In all common models of inter-temporal allocation, the assumption of a constant elasticity of intertemporal substitution (EIS) imposes surprising limitations on within-period budget allocations. Consequently, the constant EIS assumption can be tested with demand data. In fact, the EIS is pinned down completely by the shape of Engel curves: if the EIS is constant then the EIS can be estimated without variation in the interest rate. That a price elasticity can be estimated without variation in the relevant price illustrates just how strong the constant EIS assumption is. The constant EIS assumption is rejected by demand data.
Authors
Research Fellow University of Oxford
Hamish is the James Meade Professor of Economics at the University of Oxford, a Professorial Fellow of Nuffield College and a Research Fellow at IFS.
Research Fellow University of Michigan
Tom is a Research Fellow at IFS, a Research Professor for the Institute for Social Research at the University of Michigan.
Suggested citation
Crossley, T and Low, H. (2011). 'Is the elasticity of intertemporal substitution constant?' (2011)
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