Abstract
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 UK, 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.