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Consumption Growth, the Interest Rate and Aggregation

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  • Orazio P. Attanasio
  • Guglielmo Weber

Abstract

In this paper we present empirical evidence on aggregation problems with Euler equations for consumption. Our main results are: estimates of the elasticity of intertemporal substitution for consumption are consistently lower for aggregate data than for average cohort data and the theoretical model is statistically rejected on aggregate data, not rejected on average cohort data. In trying to explain these differences we find that a major role is played by the non-linearity of the estimable equation and by omitted demographic factors (normally unobservable on aggregate data). However, even when these sources of aggregation bias are corrected for, the estimates of the elasticity of intertemporal substitution obtained from aggregate data remain lower than those obtained from average cohort data, and excess sensitivity tests reject the implications of the model. This can be explained as the result of imposing identical coefficients to cohorts who differ in preferences and/or opportunity sets.

Suggested Citation

  • Orazio P. Attanasio & Guglielmo Weber, 1993. "Consumption Growth, the Interest Rate and Aggregation," Review of Economic Studies, Oxford University Press, vol. 60(3), pages 631-649.
  • Handle: RePEc:oup:restud:v:60:y:1993:i:3:p:631-649.
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    File URL: http://hdl.handle.net/10.2307/2298128
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    7. Legros, Patrick & Matsushima, Hitoshi, 1991. "Efficiency in partnerships," Journal of Economic Theory, Elsevier, pages 296-322.
    8. Bengt Holmstrom, 1979. "Moral Hazard and Observability," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 74-91, Spring.
    9. Eric Rasmusen, 1987. "Moral Hazard in Risk-Averse Teams," RAND Journal of Economics, The RAND Corporation, pages 428-435.
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