Robust Comparative Statics for the Elasticity of Intertemporal Substitution

After arriving at UCSD In 2013, I started to interact with Larry, who was a promising Ph.D. student working on macro-finance. At that time I didn’t know much about macro-finance, so I learned a lot from him. One thing I thought was weird is that most macro papers assumed an elasticity of intertemporal substitution (EIS) below 1, while most finance papers assumed EIS above 1. Choosing a parameter value depending on the application in different fields certainly sounded unscientific. I had some experience with the comparative statics of EIS, so we decided to write a paper together, without taking a stance on the value of EIS.

We presented and posted the working paper in 2015. However, it took us a long time to publish the paper because we fiddled around with the plans and could not decide whether the paper should just be theoretical or we should include an empirical application to try general interest journals. After a few unsuccessful attempts, we got an R&R from TE, but we were out of energy to revise the paper. Larry invited Joel, who was then a Ph.D. student at MIT and who played an instrumental role in reviving the paper. Recently, a working paper by a group of researchers in Norway empirically implemented our idea and estimated the EIS to be around 2.