Estimating the elasticity of intertemporal substitution using mortgage notches

Michael Carlos Best, James S. Cloyne, Ethan Ilzetzki, Henrik J. Kleven

Research output: Contribution to journalArticlepeer-review

37 Scopus citations


Using a novel source of quasi-experimental variation in interest rates, we develop a new approach to estimating the Elasticity of Intertemporal Substitution (EIS). In the U.K., the mortgage interest rate features discrete jumps - notches - at thresholds for the loan-to-value (LTV) ratio. These notches generate large bunching below the critical LTV thresholds and missing mass above them. We develop a dynamic model that links these empirical moments to the underlying structural EIS. The average EIS is small, around 0.1, and quite homogeneous in the population. This finding is robust to structural assumptions and can allow for uncertainty, a wide range of risk preferences, portfolio reallocation, liquidity constraints, present bias, and optimization frictions. Our findings have implications for the numerous calibration studies that rely on larger values of the EIS.

Original languageEnglish (US)
Pages (from-to)656-690
Number of pages35
JournalReview of Economic Studies
Issue number2
StatePublished - Mar 1 2020

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics


  • Elasticity of Intertemporal Substitution
  • bunching
  • interest rate notches
  • mortgage borrowing
  • structural estimation


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