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Changes in the output Euler equation and asset markets participation

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  • Bilbiie, Florin O.
  • Straub, Roland

Abstract

Recent estimates of the output Euler equation for the United States indicate that the elasticity of aggregate demand to interest rates is not significantly different from zero. We first argue that this result may hide a structural break: the estimated elasticity is a convolution of two coefficients with opposite signs across the samples 1965–1979 and 1982–2003. The sign of the coefficient in the earlier sample is inconsistent with standard economic theory and intuition. We outline a model with limited asset markets participation that can generate this change in sign when asset market participation changes from low to high, and provide institutional evidence for such a change in the United States in the late 1970s and early 1980s.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 36 (2012)
Issue (Month): 11 ()
Pages: 1659-1672

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Handle: RePEc:eee:dyncon:v:36:y:2012:i:11:p:1659-1672

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Keywords: IS curve; Euler equation for output; Limited asset markets participation; Aggregate demand; Rule-of-thumb consumers;

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Cited by:
  1. Florin Bilbiie & Roland Straub, 2006. "Asset Market Participation, Monetary Policy Rules, and the Great Inflation," IMF Working Papers 06/200, International Monetary Fund.
  2. Furlanetto, Francesco & Seneca, Martin, 2014. "Investment shocks and consumption," European Economic Review, Elsevier, vol. 66(C), pages 111-126.

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