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Revisiting Intertemporal Elasticity of Substitution in a Sticky Price Model by Juha Kilponen; Jouko Vilmunen; Oskari Vähämaa is a Economics, Econometrics and Finance article available to read on EtoBox.

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Macroeconomic models typically assume additively separable preferences where consumption enters the utility function in a logarithmic form. This restriction implies that consumption growth is highly sensitive to movements in real interest rates, which in turn implies an unrealistically steep demand curve and intertemporal trade-off. We re-estimate the stylized New Keynesian Model with US data using King et al. (1988) preferences with and without habits and show that the equilibrium real interest rate elasticity of output is in the range of 0.05–0.20 in the US. Such low real interest rate elasticity is better in line with the empirical consumption Euler equation literature and implies relatively weak transmission of monetary policy to output and inflation.

Who reads Revisiting Intertemporal Elasticity of Substitution in a Sticky Price Model?

Author

Juha Kilponen; Jouko Vilmunen; Oskari Vähämaa

Publisher

Elsevier BV

Published

2022

Language

EN

Field

Economics, Econometrics and Finance (Social Sciences)