The Elasticity Of Intertemporal Substitution In Consumption Under Uncertain Lifetime

In late 2008, the global financial crisis had a great impact on the economy of the world, especially on China's exports. And in 2009, the contribution of China's exports to GDP was still negative, while the stimulating effect of the consumption to economic growth was very clear. It shows that domestic demand has played a key role in stabilization and recovery of China's economy in 2009. At the same time, learn from the experience of market economies, consumer demand should among the long-term economy dominant position. Therefore, in the post-crisis era, consumption is the sustainable power of economic growth. The fundamental way of China's economy is the effective growth of the consumption. According to life cycle theory and the law of development of household consumption, economic development, increase income and other factors will make the family that meet the current necessities of life have excess consumption of wealth. Therefore, the family have the freedom of choice about intertemporal substitution in consumption, while the elasticity of intertemporal substitution in consumption is an important factor in intertemporal choice.In this paper, In the theory, based on the characteristics of China's income distribution system, the consumer's life cycle is divided into pre-retirement and retirement, respectively, the author set the intertemporal budget constraint of Life-cycle consumption of neoclassical economics theory, and derive the optimal consumption path under the assumption that lifetime uncertainty. In the empirical analysis, based on the data of urban household survey of Tianjin between January 1988 and December 2008, this paper exploits the cohort method to construct pseudo-panel data, in order to structure dynamic pseudo-panel data model and the method of GMM estimation, which respectively analyze the Intertemporal elasticity of substitution of different groups (different birth-year groups) for long term and short term.The main results of this study include:(1) on short terms, for the family that the households born before 1965, the intertemporal consumption reflects significant volatility, and the intertemporal elasticity of substitution is very small (0.008). It shows that the effect that Interest rate instruments of monetary policy eliminate the fluctuations in aggregate demand is very limited. Therefore, Improve the social security system and change their concept of consumption are the only way to stimulate domestic demand. And there are significant differences between different age groups about the current consumption of urban residents, the intertemporal elasticity of substitution shows "U" type features. (2) After dealing pseudo-panel data with the HP filter, on the long term, for the family that the households born before 1965, their intertemporal consumption show long-term growth trends, but their intertemporal elasticity of substitution was more smaller(Close to 0), it is shows that the effect that Interest rate instruments of monetary policy stimulate the consumption is very limited. Therefore the main reason that long-term low (negative) interest rate policy can not stimulate consumer demand is the low intertemporal elasticity of substitution.In view of the characteristics of intertemporal elasticity of substitution, a few of suggestions are proposed to stimulate the consumer demand, promote steady economic growth.