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Estimating the Aggregate Consumption Euler Equation with State-Dependent Parameters

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  • Mumtaz, Haroon
  • Surico, Paolo

Abstract

The consumption Euler equation is a building block of modern macro theory. Yet, the existing evidence on aggregate data offers very conflicting results for the estimates of the degree of forward-lookingness and interest rate semi-elasticity. The disappointing performance can be rationalized by estimating an Euler equation in which the parameters are allowed to vary with the state of the economy. The nonlinear method reveals that during periods in which consumption is above its conditional average the estimates of the degree of forward-lookingness and interest rate semi-elasticity are significantly larger (in absolute value) than the estimates associated with periods of below-average consumption. Our evidence is consistent with models of state-dependence or heterogeneity in the discount factor and the elasticity of intertemporal substitution.

Suggested Citation

  • Mumtaz, Haroon & Surico, Paolo, 2011. "Estimating the Aggregate Consumption Euler Equation with State-Dependent Parameters," CEPR Discussion Papers 8233, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:8233
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    Cited by:

    1. Haroon Mumtaz & Paolo Surico, 2015. "The Transmission Mechanism In Good And Bad Times," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 56(4), pages 1237-1260, November.

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    More about this item

    Keywords

    Aggregate consumption; Euler equation; Heterogeneity; State-dependence;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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