Elasticity of Intertemporal Substitution in Consumption : Empirical Evidence from a Natural Experiment

This paper estimates the elasticity of intertemporal substitution in consumption (sigma). We exploit a natural experiment provided by a change in the Indian banking legislation which authorized all the deposit collecting institutions to offer a higher interest rate on deposits to citizens above 60 years of age. Using a difference in difference approach we compare the total consumption expenditure of households whose oldest living member is 60 or 61 years old with households whose oldest living member is 59 or 58 years old, before and after the policy change. We find the estimate of sigma to be equal to approx 2.2