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Estimating Intertemporal Allocation Parameters using Simulated Expectation Errors

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Author Info
Sule Alan
Martin Browning

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Abstract

There is widespread agreement that given currently available data, we cannot accurately estimate the parameters of intertemporal allocation using GMM on Euler equations, whether they be exact or approximate. Our reading of this literature and our own results is that this is a small sample (strictly, short panel) problem. The alternative seems to be to move to full structural modelling. In the current state of the art this is cumbersome, fragile and unable to deal with significant heterogeneity. We present a novel structural estimation procedure that is based on simulating expectation errors; we refer to it as Simulated Residual Estimation (SRE). We develop variants of the basic procedure that allow us to account for measurement error in consumption, the `news` in interest rate realisations and for heterogeneity in discount factors.

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Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 284.

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Date of creation: 2006
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Handle: RePEc:oxf:wpaper:284

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Keywords: Intertemporal Allocation Expectation Errors Life-Cycle Models

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Find related papers by JEL classification:
D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving

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  13. repec:cup:etheor:v:12:y:1996:i:4:p:657-81 is not listed on IDEAS
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  15. Javier Alvarez & Martin Browning & Mette Ejrnæs, 2002. "Modelling income processes with lots of heterogeneity," 10th International Conference on Panel Data, Berlin, July 5-6, 2002 D2-3, International Conferences on Panel Data. [Downloadable!]
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