Money and its substitutes

Measurement of the elasticity of substitution between financial assets is an important element in evaluating the role that those assets play in the economy. This paper generalizes the model developed by Chetty by relaxing the separability conditions while restoring homotheticity to the utility function. The general model is found to produce empirical estimates that are statistically superior to the original, while substantially reducing the estimated elasticities of substitution. Consequently, the various types of savings accounts no longer appear to be very close substitutes for money balances.