Subjective Intertemporal Substitution

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.

Monetary Policy Communications and their Effects on Household Inflation Expectations

“…Participants are then asked a sequence of questions about their perceptions and expectations of inflation. We follow the design in the recent New York Fed Survey of Consumer Expectations (SCE) and ask specifically about inflation, because asking about prices might induce individuals to think about specific items whose prices they recall rather than about overall inflation (see Crump et al (2015) for a recent paper using the SCE data). We first ask individuals about their perception of past inflation, that is, inflation over the previous 12 months.…”

Helicopter Money: Survey Evidence on Expectation Formation and Consumption Behavior

“…Research drawing on microdata in order to elicit the relationship between ination expectations, in particular, and consumption decisions has been active in recent years (see, e.g. Burke and Ozdagli, 2013;Bachmann et al, 2015;Ichiue and Nishiguchi, 2015;Crump et al, 2015). Microdata as we use it could be helpful to shed light on this relationship because it looks at the actual decision maker (rather than aggregates).…”

Consumption Uncertainty and Precautionary Saving

“…Review of Economics and Statistics Just Accepted MS. rest by the President and Fellows of Harvard College and the Massachusetts Institute of Technology to elicit individual-level measures of income and unemployment uncertainty (Dominitz and Manski, 1997;Guiso et al, 2002;Jappelli and Pistaferri, 2000), pension uncertainty (Guiso et al, 2013), and interest rate uncertainty (Crump et al, 2015). 3 Manski (2004; surveys the literature and discusses the advantages of using measures of expectations in macroeconomics.…”

“…As a final way to check the validity of our results, we relax the assumption of the exogeneity of income risk and allow it to be positively correlated with expected consumption growth. Under this much weaker assumption, we can obtain an identification region for the 3 Crump et al (2015) estimate the elasticity of expected consumption growth with respect to variation in the expected real interest rate using the Federal Reserve Bank of New York Survey of Consumer Expectations (SCE). This dataset includes consumers' expectations of consumption growth (but not consumption risk) and inflation, with the latter providing subjective variation in ex ante real interest rates.…”