Revisiting intertemporal elasticity of substitution in a sticky price model

Macroeconomic models typically assume additively separable preferences where consumption enters the utility function in a logarithmic form. This restriction implies that growth is highly sensitive to movements real interest rates, which turn an unrealistically steep demand curve and intertemporal trade-off. We re-estimate stylized New Keynesian Model with US data using King et al. (1988) without habits show equilibrium rate elasticity of output range 0.05–0.20 US. Such low better line empirical Euler equation literature relatively weak transmission monetary policy inflation.