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Euler Equations and Durable Goods

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Abstract

This paper deals with the estimation of the Euler Equation when durable consumption is taken into account. If durables are not separable in utility from non-durables, estimating the Euler Equation without conditioning on them leads to incorrect inference. I use microdata on non-durable and durable consumption from a US rotating panel, the Consumer Expenditure Survey (CEX). I concentrate on cars (new and used). Apart from housing, they represent the largest share of durable expenditure in the sample. I find an estimate of the intertemporal rate of substitution which is higher than in the case where durable goods are not conditioned on, while the evidence on the excess sensitivity is more mixed.

Suggested Citation

  • Mario Padula, 1999. "Euler Equations and Durable Goods," CSEF Working Papers 30, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  • Handle: RePEc:sef:csefwp:30
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    File URL: http://www.csef.it/WP/wp30.pdf
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    Cited by:

    1. Laura Blow & Valérie Lechene & Peter Levell, 2014. "Using the CE to Model Household Demand," NBER Chapters,in: Improving the Measurement of Consumer Expenditures, pages 141-178 National Bureau of Economic Research, Inc.
    2. Orazio Attanasio & Erik Hurst & Luigi Pistaferri, 2014. "The Evolution of Income, Consumption, and Leisure Inequality in the United States, 1980–2010," NBER Chapters,in: Improving the Measurement of Consumer Expenditures, pages 100-140 National Bureau of Economic Research, Inc.
    3. Päivi Kankaanranta, 2006. "Consumption Over the Life Cycle: A Selected Literature Review," Discussion Papers 7, Aboa Centre for Economics.

    More about this item

    Keywords

    Euler equation; durable goods; intertemporal substitution;

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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