Estimating the Elasticity of Intertemporal Substitution Using Mortgage Notches /
Best, Michael Carlos.
Estimating the Elasticity of Intertemporal Substitution Using Mortgage Notches / Michael Carlos Best, James Cloyne, Ethan Ilzetzki, Henrik Kleven. - Cambridge, Mass. National Bureau of Economic Research 2018. - 1 online resource: illustrations (black and white); - NBER working paper series no. w24948 . - Working Paper Series (National Bureau of Economic Research) no. w24948. .
August 2018.
Using a novel source of quasi-experimental variation in interest rates, we develop a new approach to estimating the Elasticity of Intertemporal Substitution (EIS). In the UK, the mortgage interest rate features discrete jumps - notches - at thresholds for the loan-to-value (LTV) ratio. These notches generate large bunching below the critical LTV thresholds and missing mass above them. We develop a dynamic model that links these empirical moments to the underlying structural EIS. The average EIS is small, around 0.1, and quite homogeneous in the population. This finding is robust to structural assumptions and can allow for uncertainty, a wide range of risk preferences, portfolio reallocation, liquidity constraints, present bias, and optimization frictions. Our findings have implications for the numerous calibration studies that rely on larger values of the EIS.
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Mode of access: World Wide Web.
Estimating the Elasticity of Intertemporal Substitution Using Mortgage Notches / Michael Carlos Best, James Cloyne, Ethan Ilzetzki, Henrik Kleven. - Cambridge, Mass. National Bureau of Economic Research 2018. - 1 online resource: illustrations (black and white); - NBER working paper series no. w24948 . - Working Paper Series (National Bureau of Economic Research) no. w24948. .
August 2018.
Using a novel source of quasi-experimental variation in interest rates, we develop a new approach to estimating the Elasticity of Intertemporal Substitution (EIS). In the UK, the mortgage interest rate features discrete jumps - notches - at thresholds for the loan-to-value (LTV) ratio. These notches generate large bunching below the critical LTV thresholds and missing mass above them. We develop a dynamic model that links these empirical moments to the underlying structural EIS. The average EIS is small, around 0.1, and quite homogeneous in the population. This finding is robust to structural assumptions and can allow for uncertainty, a wide range of risk preferences, portfolio reallocation, liquidity constraints, present bias, and optimization frictions. Our findings have implications for the numerous calibration studies that rely on larger values of the EIS.
System requirements: Adobe [Acrobat] Reader required for PDF files.
Mode of access: World Wide Web.