Limited Asset Market Participation and the Elasticity of Intertemporal Substitution
26 Pages Posted: 11 Apr 2002 Last revised: 24 Apr 2022
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Limited Asset Market Participation and the Elasticity of Intertemporal Substitution
Date Written: April 2002
Abstract
The paper presents empirical evidence based on the US Consumer Expenditure Survey that accounting for limited asset market participation is important for estimating the elasticity of intertemporal substitution (EIS). Differences in estimates of the EIS between assetholders and non-assetholders are large and statistically significant. This is the case whether estimating the EIS based on the Euler equation for stock index returns or the Euler equation for T-bills, in each case distinguishing between assetholders and non-assetholders as best possible. Estimates of the EIS are around 0.3-0.4 for stockholders and around 0.8-1 for bondholders, and are larger for households with larger asset holdings within these two groups.
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