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Empirical evidence on the Euler equation for investment in the US

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  • Guido Ascari
  • Qazi Haque
  • Leandro M. Magnusson
  • Sophocles Mavroeidis

Abstract

Is the typical specification of the Euler equation for investment employed in DSGE models consistent with aggregate macro data? Using state-of-the-art econometric methods that are robust to weak instruments and exploit information in possible structural changes, the answer is yes. Unfortunately, however, there is very little information about the values of these parameters in aggregate data because investment is unresponsive to changes in capital utilization and the real interest rate. In DSGE models, the investment adjustment cost and the persistence of the investment-specific technology shock parameters are mainly identified by, respectively, the cross-equation restrictions and the dynamics implied by the structure of the model.

Suggested Citation

  • Guido Ascari & Qazi Haque & Leandro M. Magnusson & Sophocles Mavroeidis, 2021. "Empirical evidence on the Euler equation for investment in the US," Papers 2107.08713, arXiv.org, revised Aug 2022.
  • Handle: RePEc:arx:papers:2107.08713
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    JEL classification:

    • C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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