intertemporal substitution

intertemporal substitution

the substitution of present for future production and consumption, and vice-versa. For example, an economy that consumes a large proportion of its NATIONAL INCOME and saves and invests only a small proportion will tend, as a consequence, to experience slower ECONOMIC GROWTH and smaller consumption in future years than an economy that consumes a low proportion of its national income and saves and invests a high proportion. These trade-offs reflect the TIME PREFERENCE of consumers for current as opposed to future consumption.
References in periodicals archive ?
With our new specification of the reference level in a data-rich environment, we are able to resolve the equity-premium puzzle, risk-free-rate puzzle and the risk-free-rate volatility puzzle using plausible parameter estimates, leading to time-varying and countercyclical constant relative risk aversion (CRRA), and CRRA unrelated time varying elasticity of intertemporal substitution (EIS).
"A Tax-Based Estimate of the Elasticity of Intertemporal Substitution," Quarterly Journal of Finance, 3 (1).
The logic for these suggestions is based on the Fisher equation and the intertemporal substitution effect: if nominal interest rates are fixed, higher inflation expectations lead to lower real interest rates, creating an incentive to spend now rather than in the future.
Another potential limitation is that, in dynamic models with a CRRA per-period utility function with time-separable preferences, the coefficient of relative risk aversion is also the reciprocal of the elasticity of intertemporal substitution (EIS).
The third term summarizes the effect of habits on intertemporal substitution. Surplus consumption is expected to mean revert at the rate 1 - [phi].
Where, [I.sub.D,t] is the total private investment in the formal sector, [[eta].sub.t] is the elasticity of intertemporal substitution between home and foreign investment goods and [[gamma].sub.t] measures the proportion (persentage share) of home goods in total foraml sector investment.
Cashin, University of Michigan, and Takashi Unayama, Kobe University, "Measuring Intertemporal Substitution: Evidence from a Consumption Tax Rate Increase in Japan"
The estimated preference parameters require a low elasticity of intertemporal substitution for both nonstockholders and stockholders (around 0.3) and this estimate is within the range offered by the empirical evidence in Vissing-Jorgensen (2002).
However, whether it also increases consumption inequality depends on the elasticity of intertemporal substitution. If this elasticity is less (greater) than unity, strengthening patent protection would increase (decrease) consumption inequality.
In addition to Hayek's text and three appendices, we have here a long (24pp.) editorial introduction, extensive editorial notes to the text and two additional appendices; each of the latter relates to Hayek's post-1941 thoughts on the importance of time-preference relative to that of rates of intertemporal substitution in production.
The differences are driven mainly by the dampened wealth effect and the strengthened intertemporal substitution effect, not by the escapes emphasized by Williams (2003).
The final section covers intertemporal optimization in consumption, finance, and growth and includes chapters on optimal consumption and investment strategies in dynamic stochastic economies; differential systems in finance and life insurance; uncertain technological change and capital mobility; stochastic control, non-depletion of renewable resources, and intertemporal substitution; capital accumulation in a growth model with creative destruction; and employment cycles in a growth model with creative destruction.