Death to the Log-Linearized Consumption euler Equation! (And Very Poor Health to the Second-Order Approximation)
This paper shows that standard empirical methods for estimating log-linearized consumption Euler equations cannot successfully uncover structural parameters like the coefficient of relative risk aversion from a dataset of simulated consumers behaving exactly according to the standard model Furthermore consumption growth for simulated consumers is very highly statistically related to predictable income growth -- and thus standard 'excess sensitivity' tests would reject the hypothesis that consumers are behaving according to the standard model Results are not much better for the second-order approximation to the Euler equation The paper concludes that empirical estimation of consumption Euler equations should be abandoned and discusses some alternative empirical strategies that are not subject to the problems of Euler equation estimation
|Date of creation:||Sep 1997|
|Contact details of provider:|| Postal: 3400 North Charles Street Baltimore, MD 21218|
Web page: http://www.econ.jhu.edu
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Orazio P. Attanasio & Hamish Low, 2004.
"Estimating Euler Equations,"
Review of Economic Dynamics,
Elsevier for the Society for Economic Dynamics, vol. 7(2), pages 405-435, April.
- Christopher D. Carroll & Miles S. Kimball, 1995.
"On the concavity of the consumption function,"
Finance and Economics Discussion Series
95-10, Board of Governors of the Federal Reserve System (U.S.).
- Michaelides, Alexander & Ng, Serena, 2000.
"Estimating the rational expectations model of speculative storage: A Monte Carlo comparison of three simulation estimators,"
Journal of Econometrics,
Elsevier, vol. 96(2), pages 231-266, June.
- Alexander Michaelides & Serena Ng, 1997. "Estimating the Rational Expectations Model of Speculative Storage: A Monte Carlo Comparison of Three Simulation Estimators," Boston College Working Papers in Economics 373, Boston College Department of Economics.
- Alexander Michaelides & Serena Ng, 2000. "Estimating the rational expectations model of speculative storage : a Monte Carlo comparison of three simulation estimators," LSE Research Online Documents on Economics 198, London School of Economics and Political Science, LSE Library.
- Martin Browning & Annamaria Lusardi, 1996.
"Household Saving: Micro Theories and Micro Facts,"
Journal of Economic Literature,
American Economic Association, vol. 34(4), pages 1797-1855, December.
- Martin Browning & Annamaria Lusardi, 1996. "Household Saving: Micro Theories and Micro Facts," Discussion Papers 96-01, University of Copenhagen. Department of Economics.
- Martin Browning & Annamaria Lusardi, 1995. "Household Saving: Micro Theories and Micro Facts," Department of Economics Working Papers 1995-02, McMaster University.
- Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-1054, July.
- Karen E. Dynan, 1993. "How prudent are consumers?," Working Paper Series / Economic Activity Section 135, Board of Governors of the Federal Reserve System (U.S.).
- Stephen P. Zeldes, 1989. "Optimal Consumption with Stochastic Income: Deviations from Certainty Equivalence," The Quarterly Journal of Economics, Oxford University Press, vol. 104(2), pages 275-298.
- Dynan, Karen E, 1993. "How Prudent Are Consumers?," Journal of Political Economy, University of Chicago Press, vol. 101(6), pages 1104-1113, December.
- Orazio P. Attanasio & Guglielmo Weber, 1994.
"Is Consumption Growth Consistent with Intertemporal Optimization? Evidence from the Consumer Expenditure Survey,"
NBER Working Papers
4795, National Bureau of Economic Research, Inc.
- Attanasio, Orazio P & Weber, Guglielmo, 1995. "Is Consumption Growth Consistent with Intertemporal Optimization? Evidence from the Consumer Expenditure Survey," Journal of Political Economy, University of Chicago Press, vol. 103(6), pages 1121-1157, December.
- John Y. Campbell & N. Gregory Mankiw, 1989.
"Consumption, Income and Interest Rates: Reinterpreting the Time Series Evidence,"
in: NBER Macroeconomics Annual 1989, Volume 4, pages 185-246
National Bureau of Economic Research, Inc.
- John Y. Campbell & N. Gregory Mankiw, 1989. "Consumption, Income, and Interest Rates: Reinterpreting the Time Series Evidence," NBER Working Papers 2924, National Bureau of Economic Research, Inc.
- Gourinchas, Pierre-Olivier & Parker, Jonathan A, 2000.
"Consumption Over the Life-Cycle,"
CEPR Discussion Papers
2345, C.E.P.R. Discussion Papers.
- Christopher D. Carroll & Andrew A. Samwick, 1995.
"The Nature of Precautionary Wealth,"
NBER Working Papers
5193, National Bureau of Economic Research, Inc.
- Robert B. Barsky & Miles S. Kimball & F. Thomas Juster & Matthew D. Shapiro, 1995. "Preference Parameters and Behavioral Heterogeneity: An Experimental Approach in the Health and Retirement Survey," NBER Working Papers 5213, National Bureau of Economic Research, Inc.
- Christopher D. Carroll & Lawrence H. Summers, 1991.
"Consumption Growth Parallels Income Growth: Some New Evidence,"
in: National Saving and Economic Performance, pages 305-348
National Bureau of Economic Research, Inc.
- Chris Carroll & Lawrence H. Summers, 1989. "Consumption Growth Parallels Income Growth: Some New Evidence," NBER Working Papers 3090, National Bureau of Economic Research, Inc.
- Lawrance, Emily C, 1991. "Poverty and the Rate of Time Preference: Evidence from Panel Data," Journal of Political Economy, University of Chicago Press, vol. 99(1), pages 54-77, February.
- Shapiro, Matthew D., 1984. "The permanent income hypothesis and the real interest rate : Some evidence from panel data," Economics Letters, Elsevier, vol. 14(1), pages 93-100.
- repec:fth:harver:1435 is not listed on IDEAS
- Christopher D. Carroll, 1992. "The Buffer-Stock Theory of Saving: Some Macroeconomic Evidence," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 23(2), pages 61-156.
This item is featured on the following reading lists or Wikipedia pages:
When requesting a correction, please mention this item's handle: RePEc:jhu:papers:390. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (None)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.