An Estimate of the Elasticity of Intertemporal Substitution in a Production Economy

Abstract

The elasticity of intertemporal substitution (EIS) at the macro level has been estimated mostly based on endowment economy models and these estimates are very sensitive to the choice of interest rates that are used for estimation. Estimates based on production economy models do not need information on interest rates but require endogenous growth models that are free from both scale effects and the strong influence of population growth. Such a model is constructed and EIS is estimated without information on interest rates. The result indicates that EIS at the macro level is as low as 0.09.The elasticity of intertemporal substitution; The degree of relative risk aversion; Production economy; Endogenous growth model