Intertemporal substitution and random changes in preferences: Time series evidence for four countries

This study attempts to estimate a model of intertemporal substitution taking into account serially correlated changes in preferences with quarterly aggregate time series data for the USA, Great Britain, West Germany and Switzerland. Thereby, necessary optimality conditions representing the trade-offs between present and future consumption, present and future leisure, as well as present consumption and leisure are estimated using the forward-filtered estimator of Hayashi and Sims. The estimation results obtained for the dynamic optimality conditions reject the model formulated. The analysis of the static optimality conditions gave more satisfactory results with respect to intertemporal substitution elasticity in consumption.