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The Euler equation around the world

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  • Stracca Livio

    (European Central Bank, Kaiserstrasse 29, Frankfurt am Main 60323, Germany)

Abstract

This paper discusses the empirical challenges associated with the estimation of the New Keynesian IS curve and provides an estimate of the forward looking IS curve by pooling macro data from 31 countries, delivering over 4000 observations on which to test the specification. The main finding of the paper is that it is possible to recover the theory-consistent IS curve from macro data when the sample size is large enough and the intrument is valid and strong. I also test the validity of the instruments by comparing estimates in countries which have or do not have an independent monetary policy reaction function. Another relevant finding is that the slope of the IS curve appears to have steepened over time since the 1990s, probably reflecting financial liberalisation.

Suggested Citation

  • Stracca Livio, 2017. "The Euler equation around the world," The B.E. Journal of Macroeconomics, De Gruyter, vol. 17(2), pages 1-9, June.
    • Handle: RePEc:bpj:bejmac:v:17:y:2017:i:2:p:9:n:1
    DOI: 10.1515/bejm-2013-0117
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    Cited by:

    1. Hawkins, Raymond J. & Nguyen, Chau N., 2018. "Macroeconomic dynamics and the IS puzzle," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 12, pages 1-13.

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    More about this item

    Keywords

    identification; instrumental variables; IS curve; New Keynesian model; panel data; monetary policy;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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