Estimating the elasticity of intertemporal substitution for Mexico: a synthetic cohort panel approach

Abstract

This dissertation estimates the Elasticity of Intertemporal Substitution (EIS) for Mexico, a crucial parameter for economic policy, as it measures how households adjust their consumption in response to changes in their assets’ expected returns. Using a synthetic cohort panel constructed from ENIGH surveys spanning 1996 to 2022 and employing the Generalized Method of Moments (GMM), it addresses aggregation bias and weak identification issues commonly inherent in time-series data and interest rate predictions, unlike previous attempts for Mexico. The findings show variable EIS estimates across different specifications and GMM estimators. However, they consistently reveal a statistically significant responsiveness of consumption to income growth, suggesting a prevalent income effect. This may reflect underlying liquidity constraints or impulsive consumption patterns akin to hand-to-mouth behavior. Moreover, incorporating additional instruments and controls not only refines EIS estimates but also consistently points to a statistically significant EIS typically below one.