Intertemporal Substitution and Hyperbolic Discounting. Cambridge Working

Evidence from behavioral experiments suggests that intertem-poral preferences reflect a hyperbolic discount function. This paper shows that in contrast to exponential discounting, the elasticity of intertemporal substitution for hyperbolic consumers depends on the persistence of the change in the intertemporal relative price. In par-ticular, lasting changes in the real interest rate are likely to generate a smaller degree of intertemporal substitution in consumption than temporary changes. This result holds for both sophisticated and naive hyperbolic consumers. It provides a novel testable implica-tion of hyperbolic discounting and a new perspective on intertem-poral substitution