The Intertemporal Elasticity of Substitution in Consumption in the United States and the United Kingdom

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Abstract
As Hall (1988) notes, the magnitude of the intertemporal elasticity of substitution in consumption, σ, is "one of the central questions of macroeconomics": Do higher expected real interest rates lead to deferred consumption? We extend Hall's methodology and model, and compare results for the United States and the United Kingdom. In both cases we directly estimate the moving average process which temporal aggregation might induce in the random disturbances, and take account of consumers who do not follow the life cycle-permanent income model of consumption.

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