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Deep Structral Excavation? A Critique of Euler Equation Methods

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  • Peter M. Garber
  • Robert G. King

Abstract

Rational expectations theory instructs empirical researchers to uncover the values of 'deep' structural parameters of preferences and technology rather than the parameters of decision rules that confound these structural parameters with those of forecasting equations. This paper reevaluates one method of identifying and estimating such deep parameters, recently advanced by Hansen and Singleton, that uses intertemporal efficiency expressions (Euler equations) and basic properties of expectations to produce orthogonality conditions that permit parameter estimation and hypothesis testing. These methods promise the applied researcher substantial freedom, as it is apparently not necessary to specify the details of dynamic general equilibrium to study the behavior of a particular market participant. In this paper, we demonstrate that this freedom is illusory. That is, if there are shifts in agents' objectives which are not directly observed by the econometrician, then Euler equation methods encounter serious identification and estimation difficulties. For these difficulties to be overcome the econometrician must have prior knowledge concerning variables that are exogenous to the agent under study, as in conventional simultaneous equations theory.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Technical Working Papers with number 0031.

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Date of creation: Nov 1983
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Handle: RePEc:nbr:nberte:0031

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  1. N. Gregory Mankiw & Julio J. Rotemberg & Lawrence H. Summers, 1982. "Intertemporal Substitution in Macroeconomics," NBER Working Papers 0898, National Bureau of Economic Research, Inc.
  2. Robert E. Hall, 1981. "Intertemporal Substitution in Consumption," NBER Working Papers 0720, National Bureau of Economic Research, Inc.
  3. Goodfriend, Marvin S., 1982. "An alternate method of estimating the Cagan money demand function in hyperinflation under rational expectations," Journal of Monetary Economics, Elsevier, Elsevier, vol. 9(1), pages 43-57.
  4. Lucas, Robert E, Jr & Prescott, Edward C, 1971. "Investment Under Uncertainty," Econometrica, Econometric Society, Econometric Society, vol. 39(5), pages 659-81, September.
  5. Wallis, Kenneth F, 1980. "Econometric Implications of the Rational Expectations Hypothesis," Econometrica, Econometric Society, Econometric Society, vol. 48(1), pages 49-73, January.
  6. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, Econometric Society, vol. 50(4), pages 1029-54, July.
  7. Lars Peter Hansen & Thomas J. Sargent, 1980. "Linear rational expectations models for dynamically interrelated variables," Working Papers, Federal Reserve Bank of Minneapolis 135, Federal Reserve Bank of Minneapolis.
  8. Hansen, Lars Peter & Singleton, Kenneth J, 1982. "Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations Models," Econometrica, Econometric Society, Econometric Society, vol. 50(5), pages 1269-86, September.
  9. Long, John B, Jr & Plosser, Charles I, 1983. "Real Business Cycles," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 91(1), pages 39-69, February.
  10. Fumio Hayashi, 1980. "Estimation of Macroeconometric Models Under Rational Expectations: A Survey," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 444, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  11. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, Econometric Society, vol. 46(6), pages 1429-45, November.
  12. Kennan, John, 1979. "The Estimation of Partial Adjustment Models with Rational Expectations," Econometrica, Econometric Society, Econometric Society, vol. 47(6), pages 1441-55, November.
  13. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 1(1), pages 19-46, January.
  14. McCallum, Bennett T, 1976. "Rational Expectations and the Natural Rate Hypothesis: Some Consistent Estimates," Econometrica, Econometric Society, Econometric Society, vol. 44(1), pages 43-52, January.
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