Estimation of discount factor (beta) and coefficient of relative risk aversion (gamma) in selected countries
AbstractWe 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 InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 39736.
Date of creation: 29 Jun 2012
Date of revision:
Discount Factor; Risk Aversion; Euler Equation; GMM;
Find related papers by JEL classification:
- C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
- D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving
- E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
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