On the Aggregation of Euler Equations for Consumption in Simple Overlapping-Generations Models
If consumers have finite lives, the aggregate consumption growth equation is affected by entries and exits (births and deaths). The authors use two- and three-period overlapping-generations models to show that entries and exits produce a relationship between aggregate consumption growth and the interest rate that is fundamentally different from the individual Euler equation for consumption. If aggregate data are used to estimate an 'aggregate' Euler equation, under plausible assumptions they show that the estimate of the elasticity of intertemporal substitution is downward biased and that consumption growth exhibits excess sensitivity to labor income. Copyright 1995 by The London School of Economics and Political Science.
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Volume (Year): 62 (1995)
Issue (Month): 248 (November)
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