Intertemporal Substitution in Macroeconomics (Classic Reprint) - Hardcover

Mankiw, N. Gregory

9780331104660: Intertemporal Substitution in Macroeconomics (Classic Reprint)

Hardcover

ISBN 10: 0331104660 ISBN 13: 9780331104660

Publisher: Forgotten Books, 2018

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Excerpt from Intertemporal Substitution in Macroeconomics

Modern neoclassical theories of the business cycle are founded upon the assumption that fluctuations in consumption and employment are the consequence of dynamic optimizing behavior by economic agents who face no quantity constraints. In this paper, we present and estimate an explicit Operational model of an optimizing household. Our examination of post war aggregate data provides no support for these theories.

As in many recent studies of consumption and asset returns, we posit that observed fluctuations can be modeled as the outcome of optimizing decisions of a representative individual. The individual has a utility function that is additively separable through time and faces an economic environment where future opportunities are uncertain. Our approach avoids the intractable problem of finding a closed form solution for the representative individual's choices. Rather, we use the restrictions on the data implied by the first-order conditions for an optimum. The estimation of these first-order conditions makes it possible to recover the structural parameters of the underlying utility function.

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