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Estimating Intertemporal Allocation Parameters using Simulated Expectation Errors

  • Martin Browning
  • Sule Alan

There is widespread agreement that given currently available data, we cannot accurately estimate the parameters of intertemporal allocation using GMM on Euler equations, whether they be exact or approximate. Our reading of this literature and our own results is that this is a small sample (strictly, short panel) problem. The alternative seems to be to move to full structural modelling. In the current state of the art this is cumbersome, fragile and unable to deal with significant heterogeneity. We present a novel structural estimation procedure that is based on simulating expectation errors; we refer to it as Simulated Residual Estimation (SRE). We develop variants of the basic procedure that allow us to account for measurement error in consumption, the `news` in interest rate realisations and for heterogeneity in discount factors.

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File URL: http://www.economics.ox.ac.uk/materials/working_papers/paper284.pdf
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Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 284.

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Date of creation: 01 Oct 2006
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Handle: RePEc:oxf:wpaper:284
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