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Estimation of discount factor (beta) and coefficient of relative risk aversion (gamma) in selected countries

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  • Ahmed, Waqas
  • Haider, Adnan
  • Iqbal, Javed

Abstract

We estimate the long-run discount factor for a group of developed and developing countries through standard methodology incorporating adaptive expectations of inflation. We find that the discount factor of developing countries is relatively nearer to unity as compared to that of the developed countries. In the second part, while considering a standard Euler equation for household's intertemporal consumption, we estimate the parameter of constant relative risk aversion (CRRA) for Pakistan by using the Generalized Method of Moments (GMM) approach. The resulting parameter value of CRRA confirms to the empirical range for developing countries (as given in, Cardenas and Carpenter, 2008). The GMM estimator for the discount factor reinforces its result from the first part of the paper. Consequently we show that different combination values for both the parameters result in different (in terms of magnitude) impulse response functions, in response to tight monetary policy shocks in a simple New Keynesian macroeconomic model.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 39736.

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Date of creation: 29 Jun 2012
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Handle: RePEc:pra:mprapa:39736

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Keywords: Discount Factor; Risk Aversion; Euler Equation; GMM;

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  1. Kocherlakota, Narayana R., 1990. "On tests of representative consumer asset pricing models," Journal of Monetary Economics, Elsevier, vol. 26(2), pages 285-304, October.
  2. Lars Peter Hansen & Thomas J. Sargent, 1979. "Formulating and estimating dynamic linear rational expectations models," Working Papers 127, Federal Reserve Bank of Minneapolis.
  3. Fuhrer, Jeffrey C. & Moore, George R. & Schuh, Scott D., 1995. "Estimating the linear-quadratic inventory model Maximum likelihood versus generalized method of moments," Journal of Monetary Economics, Elsevier, vol. 35(1), pages 115-157, February.
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  5. Pozzi, Lorenzo, 2003. "The coefficient of relative risk aversion: a Monte Carlo study investigating small sample estimator problems," Economic Modelling, Elsevier, vol. 20(5), pages 923-940, September.
  6. Ogaki, M & Reinhart, C-M, 1995. "Measuring Intertemporal Substitution : The Role of Durable Goods," RCER Working Papers 404, University of Rochester - Center for Economic Research (RCER).
  7. Orazio P. Attanasio & Hamish Low, 2000. "Estimating Euler Equations," NBER Technical Working Papers 0253, National Bureau of Economic Research, Inc.
  8. Epstein, Larry G & Zin, Stanley E, 1991. "Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: An Empirical Analysis," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 263-86, April.
  9. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-87, December.
  10. Sule Alan & Martin Browning, 2003. "Estimating Intertemporal Allocation Parameters using Simulated Residual Estimation," CAM Working Papers 2003-03, University of Copenhagen. Department of Economics. Centre for Applied Microeconometrics.
  11. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
  12. Charles A. Holt & Susan K. Laury, 2002. "Risk Aversion and Incentive Effects," American Economic Review, American Economic Association, vol. 92(5), pages 1644-1655, December.
  13. Robert E. Hall, 1988. "Intertemporal Substitution in Consumption," NBER Working Papers 0720, National Bureau of Economic Research, Inc.
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Cited by:
  1. Haider, Adnan & Jan, Asad & Hyder, Kalim, 2012. "On the (IR) Relevance of Monetary Aggregate Targeting in Pakistan: An Eclectic View," MPRA Paper 43422, University Library of Munich, Germany.
  2. Ahmed, Waqas & Rehman, Muhammad & Malik, Jahanzeb, 2013. "Quarterly Bayesian DSGE Model of Pakistan Economy with Informality," MPRA Paper 53168, University Library of Munich, Germany.
  3. Adnan Haider & Musleh ud Din & Ejaz Ghani, 2012. "Monetary Policy, Informality and Business Cycle Fluctuations in a Developing Economy Vulnerable to External Shocks," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 51(4), pages 609-682.

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