INTERTEMPORAL SUBSTITUTION AND LAMBDA-CONSTANT COMPARATIVE STATICS

This paper characterizes intertemporal substitution along intertemporal consumption profiles. A precise definition of the intertemporal elasticity of substitution is presented and compared to intertemporal analogs of the Hicks-Alien and direct elasticities of substitution, and the marginal-utility-of-wealth (or lambda-) constant own-price elasticity of demand. In a model with perfect foresight, I establish that lambda-constant comparative statics accurately characterizes intertemporal substitution if and only if lifetime utility is intertemporally additive. I also demonstrate the usefulness of lambda-constant comparative statics in characterizing intertemporal substitution in models without time separability or perfect foresight.