Research Discussion Papers, Bank of Finland
No 9/2013:
Estimating intertemporal elasticity of substitution in a sticky price model
Juha Kilponen ()
, Jouko Vilmunen ()
and Oskari Vähämaa ()
Abstract: 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; (follow links to similar papers)
JEL-Codes: E21; E32; E52; (follow links to similar papers)
27 pages, May 27, 2013
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