This file is part of IDEAS, which uses RePEc data


[ Papers | Articles | Software | Books | Chapters | Authors | Institutions | JEL Classification | NEP reports | Search | New papers by email | Author registration | Rankings | Volunteers | FAQ | Blog | Help! ]

Death to the Log-Linearized Consumption Euler Equation! (And Very Poor Health to the Second-Order Approximation)

Author info | Abstract | Publisher info | Download info | Related research | Statistics
Author Info
Christopher D. Carroll

Additional information is available for the following registered author(s):

Abstract

This paper shows that standard empirical methods for estimating log-linearized" consumption Euler equations cannot successfully uncover structural parameters like the" coefficient of relative risk aversion from the dataset of simulated consumers behaving exactly" according to the standard model. Furthermore, consumption growth for the simulated consumers" is very highly statistically related to predictable income growth - and thus standard excess" sensitivity' tests would reject the hypothesis that consumers are behaving according to the" standard model. Results are not much better for the second-order approximation to the Euler" equation. The paper concludes that empirical estimation of consumption Euler equations should" not be abandoned, and discusses some alternative empirical strategies that are not subject to the" problems of Euler equation estimation.

Download Info
To download:

If you experience problems downloading a file, check if you have the proper application to view it first. Information about this may be contained in the File-Format links below. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.nber.org/papers/w6298.pdf
File Format: application/pdf
File Function:
Download Restriction: Access to the full text is generally limited to series subscribers, however if the top level domain of the client browser is in a developing country or transition economy free access is provided. More information about subscriptions and free access is available at http://www.nber.org/wwphelp.html.

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Publisher Info
Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6298.

Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Length:
Date of creation: Dec 1997
Date of revision:
Handle: RePEc:nbr:nberwo:6298

Note: EFG ME
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Phone: 617-868-3900
Email:
Web page: http://www.nber.org
More information through EDIRC

For technical questions regarding this item, or to correct its listing, contact: ().

Related research
Keywords:

Other versions of this item:

Find related papers by JEL classification:
C6 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming
D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Carroll, Christopher D & Kimball, Miles S, 1996. "On the Concavity of the Consumption Function," Econometrica, Econometric Society, vol. 64(4), pages 981-92, July. [Downloadable!] (restricted)
    Other versions:
  2. Shapiro, Matthew D., 1984. "The permanent income hypothesis and the real interest rate : Some evidence from panel data," Economics Letters, Elsevier, vol. 14(1), pages 93-100. [Downloadable!] (restricted)
  3. Lawrance, Emily C, 1991. "Poverty and the Rate of Time Preference: Evidence from Panel Data," Journal of Political Economy, University of Chicago Press, vol. 99(1), pages 54-77, February. [Downloadable!] (restricted)
  4. Chris Carroll & Lawrence H. Summers, 1989. "Consumption Growth Parallels Income Growth: Some New Evidence," NBER Working Papers 3090, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  5. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July. [Downloadable!] (restricted)
  6. Robert B. Barsky & Miles S. Kimball & F. Thomas Juster & Matthew D. Shapiro, 1997. "Preference Parameters and Behavioral Heterogeneity: An Experimental Approach in the Health and Retirement Survey," NBER Working Papers 5213, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Orazio P. Attanasio & Hamish Low, 2000. "Estimating Euler Equations," NBER Technical Working Papers 0253, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  8. Zeldes, Stephen P, 1989. "Optimal Consumption with Stochastic Income: Deviations from Certainty Equivalence," The Quarterly Journal of Economics, MIT Press, vol. 104(2), pages 275-98, May. [Downloadable!] (restricted)
    Other versions:
  9. John Y. Campbell & N. Gregory Mankiw, 1990. "Consumption, Income, and Interest Rates: Reinterpreting the Time Series Evidence," NBER Working Papers 2924, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  10. Christopher D. Carroll, 1992. "The Buffer-Stock Theory of Saving: Some Macroeconomic Evidence," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 23(1992-2), pages 61-156. [Downloadable!]
  11. Orazio P. Attanasio & Guglielmo Weber, 1994. "Is Consumption Growth Consistent with Intertemporal Optimization? Evidence from the Consumer Expenditure Survey," NBER Working Papers 4795, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  12. repec:fth:harver:1435 is not listed on IDEAS
  13. Alexander Michaelides & Serena Ng, 1997. "Estimating the Rational Expectations Model of Speculative Storage: A Monte Carlo Comparison of Three Simulation Estimators," Boston College Working Papers in Economics 373, Boston College Department of Economics. [Downloadable!]
    Other versions:
  14. Martin Browning & Annamaria Lusardi, 1996. "Household Saving: Micro Theories and Micro Facts," Discussion Papers 96-01, University of Copenhagen. Department of Economics.
    Other versions:
  15. Karen E. Dynan, 1993. "How prudent are consumers?," Working Paper Series / Economic Activity Section 135, Board of Governors of the Federal Reserve System (U.S.).
  16. Pierre-Olivier Gourinchas & Jonathan A. Parker, 1999. "Consumption Over the Life Cycle," NBER Working Papers 7271, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  17. Carroll, Christopher D. & Samwick, Andrew A., 1997. "The nature of precautionary wealth," Journal of Monetary Economics, Elsevier, vol. 40(1), pages 41-71, September. [Downloadable!] (restricted)
    Other versions:
  18. Dynan, Karen E, 1993. "How Prudent Are Consumers?," Journal of Political Economy, University of Chicago Press, vol. 101(6), pages 1104-13, December. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Jesus Fernandez-Villaverde & Dirk Krueger, 2002. "Consumption over the Life Cycle: Facts from Consumer Expenditure Survey Data," NBER Working Papers 9382, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Midori Wakabayashi & Charles Yuji Horioka, 2005. "Borrowing Constraints and Consumption Behavior in Japan," NBER Working Papers 11560, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Rob Alessie & Federica Teppa, 2002. "Saving and Habit Formation: Evidence from Dutch Panel Data," Tinbergen Institute Discussion Papers 02-076/3, Tinbergen Institute. [Downloadable!]
    Other versions:
  4. Giorgio Primiceri & Thijs van Rens, 2002. "Inequality over the Business Cycle: Estimating Income Risk Using Micro-Data on Consumption," Economics Working Papers 943, Department of Economics and Business, Universitat Pompeu Fabra, revised Oct 2004. [Downloadable!]
    Other versions:
  5. Jeong-Joon Lee & Yasuyuki Sawada, 2005. "Precautionary Saving under LiquidityConstraints: Evidence from Rural Pakistan," CIRJE F-Series CIRJE-F-377, CIRJE, Faculty of Economics, University of Tokyo. [Downloadable!]
  6. Yasuyuki Sawada & Kazumitsu Nawata & Masako Ii & Jeong-Joon Lee, 2007. "Did the Credit Crunch in Japan Affect Household Welfare? An Augmented Euler Equation Approach Using Type 5 Tobit Model," CIRJE F-Series CIRJE-F-498, CIRJE, Faculty of Economics, University of Tokyo. [Downloadable!]
  7. Melvin Stephens Jr. & Steven J. Haider, 2003. "Can Unexpected Retirement Explain The Retirement-Consumption Puzzle? Evidence For Subjective Retirement Expectations," Working Papers, Center for Retirement Research at Boston College 2003-15, Center for Retirement Research. [Downloadable!]
  8. Sun Jin Kang & Yasuyuki Sawada, 2003. "Credit Crunches and Household Welfare: The Case of the Korean Financial Crisis," CIRJE F-Series CIRJE-F-234, CIRJE, Faculty of Economics, University of Tokyo. [Downloadable!]
    Other versions:
  9. Chris Elbers & Jan Willem Gunning & Bill Kinsey, 2003. "Growth and Risk: Methodology and Micro Evidence," Tinbergen Institute Discussion Papers 03-068/2, Tinbergen Institute, revised 19 Sep 2006. [Downloadable!]
    Other versions:
  10. Andrew Benito & Haroon Mumtaz, . "Consumption excess sensitivity, liquidity constraints and the collateral role of housing," Bank of England working papers 306, Bank of England. [Downloadable!]
  11. Steven Haider & Melvin Stephens Jr., 2004. "Is There a Retirement-Consumption Puzzle? Evidence Using Subjective Retirement Expectations," NBER Working Papers 10257, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  12. Sydney Ludvigson & Christina H. Paxson, 1999. "Approximation Bias in Linearized Euler Equations," NBER Technical Working Papers 0236, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  13. Jesús Fernández-Villaverde & Dirk Krueger, 2003. "Consumption over the Life Cycle: Some Facts from Consumer Expenditure Survey Data," Levine's Bibliography 506439000000000304, UCLA Department of Economics. [Downloadable!]
    Other versions:
  14. Orazio P. Attanasio & Hamish Low, 2004. "Estimating Euler Equations," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(2), pages 405-435, April. [Downloadable!] (restricted)
    Other versions:
  15. Jonathan Gruber, 2006. "A Tax-Based Estimate of the Elasticity of Intertemporal Substitution," NBER Working Papers 11945, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  16. Kevin X. D. Huang & Zheng Liu & Qi Zhu, 2006. "Temptation and self-control: some evidence and applications," Staff Report 367, Federal Reserve Bank of Minneapolis. [Downloadable!]
    Other versions:
  17. Christopher D. Carroll & Jody Overland & David N. Weil, 2000. "Saving and Growth with Habit Formation," American Economic Review, American Economic Association, vol. 90(3), pages 341-355, June. [Downloadable!] (restricted)
    Other versions:
  18. Yasuyuki Sawada & Jeong-Joon Lee, 2006. "The Degree of Precautionary Saving: A Reexamination," CIRJE F-Series CIRJE-F-448, CIRJE, Faculty of Economics, University of Tokyo. [Downloadable!]
    Other versions:
  19. M. Fatih Guvenen, 2002. "Reconciling Conflicting Evidence on the Elasticity of Intertemporal Substitution: A Macroeconomic Perspective," RCER Working Papers 491, University of Rochester - Center for Economic Research (RCER), revised Mar 2003. [Downloadable!]
    Other versions:
  20. Han Hong & Bruce Preston, 2008. "Bayesian Averaging, Prediction and Nonnested Model Selection," NBER Working Papers 14284, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
Statistics
Access and download statistics

Did you know? A few items listed on IDEAS are over 2000 years old!

This page was last updated on 2009-11-21.

This information is provided to you by IDEAS at the Department of Economics, College of Liberal Arts and Sciences, University of Connecticut using RePEc data on a server sponsored by the Society for Economic Dynamics.