The intertemporal elasticity of substitution in consumption : Some empirical evidence from Finnish data

Abstract

One of the important determinants of the response of consumption and saving to the expected real interest rate is the elasticity of intertemporal substitution. Knowledge about the size of this structural parameter is required if the effectiveness of policy interventions, or business cycles, is to be studied by means of macro models. Rather robust evidence from Finnish data suggests that this substitution effect is very small. In the light of this study there does not seem to be much scope for a policy aiming e.g. at making consumers defer consumption by raising their real interest rate expectations.