September 30, 2003
Intertemporal Substitution
Why do people save money?
One approach to this issue is to consider consumption in two time periods to be two different goods and apply the standard two goods - two prices analysis.
It is not good economics to answer questions by putting prices, interest rates, or money into untility functions.
We explain the role of the interest rate instead by observing that it plays an important role in the intertemporal budget constraint.
As you can see, if you raise the interest rate, people save more.
Posted by bparke at September 30, 2003 04:59 PM