The Federal Reserve Board published a research paper assessing whether households substitute consumption intertemporally when real interest rates move, finding no evidence that they systematically shift the timing of consumption in response to interest rate changes. The paper combines microdata on the intertemporal marginal propensity to consume with 10 structural macroeconomic shocks. While several of the shocks generate large and persistent changes in real interest rates that would imply sizable intertemporal substitution in many models, the results indicate that changes in the expected path of income explain almost all of the aggregate consumption response, leaving no role for intertemporal substitution.
Federal Reserve Board 2025-03-25
Federal Reserve Board study finds little evidence households shift consumption timing in response to real interest rate changes
The Federal Reserve Board released a research paper concluding that households do not systematically adjust consumption timing in response to real interest rate changes. The study, using microdata and 10 structural macroeconomic shocks, found that changes in expected income paths account for nearly all aggregate consumption responses, negating the role of intertemporal substitution.