NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Real Interest and Consumption

Robert E. Hall

NBER Working Paper No. 1694*
Issued in August 1985
NBER Program(s):   EFG

One of the important determinants of the response of saving and consumption to the real interest rate is the elasticity of intertemporal substitution. That elasticity can be measured by the response of the rate of change of consumption to changes in the expected real interest rate. A detailed study of data for the twentieth-century United States shows no strong evidence that the elasticity of intertemporal substitution is positive. Earlier studies flnding substantially positive elasticities are shown to suffer from a bias related to the timing of instrumental variables.

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