Intertemporal Substitution in Macroeconomics


Mankiw NG, Rotemberg J, Summers L. Intertemporal Substitution in Macroeconomics. Quarterly Journal of Economics. 1985;100 (Feb) :225-251.


Modern neoclassical business cycle theories posit that the observed fluctuations in consumption and employment correspond to decisions of an optimizing representative individual. We estimate three first-order conditions that represent three tradeoffs faced by such an optimizing individual. He can trade off present for future consumption, present for future leisure, and present consumption for present leisure. The aggregate U. S. data lend no support to this model. The overidentifying restrictions are rejected, and the estimated utility function is often convex. Even when it is concave, the estimates imply that either consumption or leisure is an inferior good.

Last updated on 07/16/2012