Housing Returns and Intertemporal Substitution in Consumption : Estimates for Industrial Economies

This paper uses housing returns to estimate the elasticity of intertemporal substitution (EIS) in consumption for fifteen advanced economies over the postwar period 1950-2015. As housing is the main asset for the majority of households, returns on housing may be better suited to estimate the EIS than the asset returns typically considered in the literature, i.e., equity and bill returns. A regression equation for aggregate consumption growth and returns is obtained from the aggregation of the consumption Euler equations of heterogeneous agents. It is estimated using instrumental variables where the domestic return is instrumented with its own lag and a cross-country average of foreign returns. Both instruments are strong and allow to test the overidentifying restriction which holds once we control for common factors in the regression. We report elasticity estimates in the range of 0.17-0.25 which are substantially larger than the elasticities estimated from equity and bill returns