Estimating the Elasticity of Intertemporal Substitution Using Mortgage Notches

• Michael Carlos Best ^[1] ; James S. Cloyne ^[2] ; Ethan Ilzetzki ^[3] ; Henrik J. Kleven ^[4]
  1. [1] Columbia University

     Columbia University

     Estados Unidos

     
  2. [2] UC Davis Children's Hospital

     UC Davis Children's Hospital

     Estados Unidos

     
  3. [3] London School of Economics and Political Science

     London School of Economics and Political Science

     Reino Unido

     
  4. [4] Princeton University

     Princeton University

     Estados Unidos

     

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• Localización: Review of economic studies, ISSN 0034-6527, Vol. 87, Nº 2, 2020, págs. 656-690
• Idioma: inglés
• Texto completo no disponible (Saber más ...)
• Resumen

  • 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 U.K., 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.