Intertemporal Substitution in Consumption: A Literature Review

Thimme, Julian

doi:10.1111/joes.12142

Cited by 84 publications

(22 citation statements)

References 233 publications

(275 reference statements)

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“…3 The estimation results for other speci…cations are available upon request. 2 4 This is robust even when we estimate our preferred model speci…cation allowing for indeterminacy with the technique ofBianchi and Nicolò (2017).2 5Lubik and Schorfheide (2007) estimate values for for Canada of 0:31 and 0:29 depending on their choice of priors, somewhat smaller than our estimate of 0:44 but well-within the range of values for that are consistent with the bulk of the empirical evidence(Havránek (2015),Thimme (2017)). …”

supporting

confidence: 67%

Ties that Bind: Estimating the Natural Rate of Interest for Small Open Economies

Grossman¹,

Martínez‐García²,

Wynne³

et al. 2019

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supporting

confidence: 67%

Ties that Bind: Estimating the Natural Rate of Interest for Small Open Economies

Grossman¹,

Martínez‐García²,

Wynne³

et al. 2019

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“…Our paper is also part of a growing literature that studies how disagreement impacts 11 Thimme (2016) provides a review of the literature on the EIS and discusses several recent advances of the theory and highlights estimation challenges since the early, close to zero, EIS estimates by Hall (1988). bond markets.…”

Section: Introductionmentioning

confidence: 99%

Disagreement about inflation and the yield curve

Ehling

Gallmeyer

Heyerdahl-Larsen

et al. 2018

Journal of Financial Economics

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We show that inflation disagreement, not just expected inflation, has an impact on nominal interest rates. In contrast to expected inflation, which mainly a↵ects the wedge between real and nominal yields, inflation disagreement a↵ects nominal yields predominantly through its impact on the real side of the economy. We show theoretically and empirically that inflation disagreement raises real and nominal yields and their volatilities. Inflation disagreement is positively related to consumers' cross-sectional consumption growth volatility and trading in fixed income securities. Calibrating our model to disagreement, inflation, and yields reproduces the economically significant impact of inflation disagreement on yield curves. , and seminar participants at several conferences and institutions for comments and suggestions. A special thanks goes to Johannes Ruf for many useful discussions about our theoretical results. . 5 We show in the Internet Appendix that inflation disagreement also has an economically and statistically positive e↵ect on the break-even inflation rate and the inflation risk premium. 6 Armantier, de Bruin, Topa, van der Klaauw, and Zafar (2015) show that consumers act on the inflation expectations they report in the MSC. 7 We also show in the Internet Appendix that real and nominal yields and their volatilities are higher when inflation disagreement is high after controlling for disagreement about real GDP growth and earnings. 12 Other papers that empirically explore the role of inflation beliefs on the term structure include Ang, provides a survey of this literature. N 132 132 132 132 132 132 adj. R 2 0.40 0.39 0.56 0.55 0.16 0.14 0.31 0.33 N 132 132 438 438 132 132 132 132 DisInf 0.37 0.40 0.54 0.64 0.29 0.28 0.45 0.49 t-stat 3.50 3.63 4.55 5.42 2.27 2.12 2.55 3.00 ExpInf 0.43 0.40 0.26 0.14 0.35 0.36 0.25 0.24 N 132 132 438 438 132 132 132 132The coe cients for disagreement are positive as well as economically and statistically significant for the SPF and MSC at all maturities, as shown in the top panel of Table 2. An increase in disagreement by one standard deviation for the SPF (0.34%) and the MSC (1.95%) raises the two-year nominal yield by 36% and 51% of its standard deviation (3.42% and 3.63%, respectively). The economic significance of inflation disagreement is large and N 132

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“…in a model with Epstein-Zin preferences and consumption shocks, estimate an EIS of 1.5. Other estimates vary further(Havránek, 2015;Thimme, 2017), whileEpstein et al (2014) offers a potent critique by pointing to the sizeable magnitude of implied time premia by standard calibrations of Epstein-Zin utility specifications. Note that our calibrated EIS of 0.9 is belowBansal and Yaron's (2004), largely because their model assumes persistent shocks to consumption growth rates.…”

mentioning

confidence: 99%

Applying Asset Pricing Theory to Calibrate the Price of Climate Risk

Daniel

Litterman²,

Wagner³

2016

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Pricing greenhouse gas emissions involves making trade-offs between consumption today and unknown damages in the (distant) future. This setup calls for an optimal control model to determine the carbon dioxide (CO2) price. It also relies on society's willingness to substitute consumption across time and across uncertain states of nature, the forte of Epstein-Zin preference specifications. We develop the EZ-Climate model, a simple discrete-time optimization model in which uncertainty about the effect of CO2 emissions on global temperature and on eventual damages is gradually resolved over time. We embed a number of features including potential tail risk, exogenous and endogenous technological change, and backstop technologies. The EZ-Climate model suggests a high optimal carbon price today that is expected to decline over time as uncertainty about the damages is resolved. It also points to the importance of backstop technologies and to very large deadweight costs of delay. We decompose the optimal carbon price into two components: expected discounted damages and the risk premium.

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Intertemporal Substitution in Consumption: A Literature Review

Cited by 84 publications

References 233 publications

Ties that Bind: Estimating the Natural Rate of Interest for Small Open Economies

Ties that Bind: Estimating the Natural Rate of Interest for Small Open Economies

Disagreement about inflation and the yield curve

Applying Asset Pricing Theory to Calibrate the Price of Climate Risk

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