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Estimating the Euler equation for output

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  • Jeffrey C. Fuhrer
  • Glenn D. Rudebusch

Abstract

New Keynesian macroeconomic models have generally emphasized that expectations of future output are a key factor in determining current output. The theoretical motivation for such forward-looking behavior relies on a straightforward generalization of the well-known Euler equation for consumption. In this paper, we use maximum likelihood and generalized method of moments (GMM) methods to explore the empirical importance of output expectations. We find little evidence that rational expectations of future output help determine current output, especially after taking into account the small-sample bias in GMM.

Suggested Citation

  • Jeffrey C. Fuhrer & Glenn D. Rudebusch, 2002. "Estimating the Euler equation for output," Working Paper Series 2002-12, Federal Reserve Bank of San Francisco.
    • Handle: RePEc:fip:fedfwp:2002-12
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    References listed on IDEAS

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    Consumption (Economics); Productivity;

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