Robust Comparative Statics for the Elasticity of Intertemporal Substitution

39 Pages Posted: 4 Jan 2015 Last revised: 28 Jan 2022

See all articles by Joel P. Flynn

Joel P. Flynn

Yale University

Lawrence Schmidt

MIT Sloan School of Management

Alexis Akira Toda

University of California, San Diego (UCSD) - Department of Economics

Date Written: January 25, 2022

Abstract

We study a general class of consumption-savings problems with recursive preferences. We characterize the sign of the consumption response to arbitrary shocks in terms of the product of two sufficient statistics: the elasticity of intertemporal substitution between contemporaneous consumption and continuation utility (EIS), and the relative elasticity of the marginal value of wealth (REMV). Under homotheticity, the REMV always equals one, so the propensity of the agent to save or dissave is always signed by the relationship of the EIS with unity. We apply our results to derive comparative statics in classical problems of portfolio allocation, consumption-savings with income risk, and entrepreneurial investment. Our results suggest empirical identification strategies for both the value of the EIS and its relationship with unity.

Keywords: elasticity of intertemporal substitution, optimal portfolio problem, recursive preferences

JEL Classification: D91, E21, G11

Suggested Citation

Flynn, Joel P. and Schmidt, Lawrence and Toda, Alexis Akira, Robust Comparative Statics for the Elasticity of Intertemporal Substitution (January 25, 2022). Available at SSRN: https://ssrn.com/abstract=2544688 or http://dx.doi.org/10.2139/ssrn.2544688

Joel P. Flynn

Yale University ( email )

493 College St
New Haven, CT CT 06520
United States

Lawrence Schmidt (Contact Author)

MIT Sloan School of Management ( email )

77 Massachusetts Avenue
Cambridge, MA 02139-4307
United States

HOME PAGE: http://https://sites.google.com/site/lawrencedwschmidt/home

Alexis Akira Toda

University of California, San Diego (UCSD) - Department of Economics ( email )

9500 Gilman Drive
Mail Code 0508
La Jolla, CA 92093-0508
United States

HOME PAGE: http://https://sites.google.com/site/aatoda111/

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