Elasticity of Intertemporal Substitution

Consumption is the principal feature of Iran€™s Gross National Production. Therefore, recognizing of factors that influence it is quite crucial. This article, investigates habit formation, durability, relative risk aversion and intertemporal substitution in consumption expenditures of Iranian households. For empirical study, at first, we constructed two weighted portfolio of the main assets return that households hold them. Then, by using generalized method of moments, we examined some models with the mentioned factors in pattern of households€™ consumption for 1979-2012 periods. Our Empirical findings indicated that for durable goods, the effect of habit persistence dominated the effect of durability in consumption expenditures and for semi durable goods vice versa. Also, for semi-durable and durable goods the effect of durability dominated the effect of habit formation. Furthermore, the results indicate that coefficients of relative risk aversion and elasticity of intertemporal substitution are between 0.25 to 0.95 and 1.05 to 4, respectively.    JEL Classification: C26, D91, G11

We present estimates of the Elasticity of Intertemporal Substitution (EIS) for Iranian households using synthetic cohort panels based on household micro-data. Results show significant difference with the common values used in Dynamic Stochastic General Equilibrium (DSGE) models which are originally based on estimated values for developed countries. We show that this difference has important theoretical and practical implications. In a simple Real Business Cycle (RBC) setting using the estimated values rather than the common values will help explain 33% more of consumption volatility. We also study the role of EIS in the consumption response to a monetary shock in a Smets & Wouters (2003) model as a benchmark for New-Keynesian monetary models. Results indicate that the monetary policy shock has less impact on consumption in a country with lower elasticity of intertemporal substitution. JEL Classification: D91, E21