Estimating intertemporal elasticity of substitution in a sticky price model
Kilponen, Juha; Vilmunen, Jouko; Vähämaa, Oskari (26.05.2013)
Numero
9/2013Julkaisija
Bank of Finland
2013
Julkaisun pysyvä osoite on
https://urn.fi/URN:NBN:fi:bof-20140807270Tiivistelmä
Cancellation of income and substitution effect implied by King-Plosser-Rebelo (1988) preferences breaks tight coefficient restriction between the slope of the Phillips curve and the elasticity of consumption with respect to real interest rate in a sticky price macro model. This facilitates the estimation of intertemporal elasticity of substitution using full information Bayesian Maximum Likelihood techniques within a structural model. The US data from the period 1984 - 2007 supports low intertemporal elasticity of substitution and strongly rejects a logarithmic and an additively separable utility specification commonly applied in the New Keynesian literature. Keywords: Monetary policy, Bayesian estimation, Non-separable utility. JEL: E32, E52, E21