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A note on Measurement Error and Euler Equations: an Alternative to Log-Linear Approximations

  • Eva Ventura

    (UPF)

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    Empirical research based on panel data has to pay special attention to measurement errors. Utility maximization often yields nonlinear decision rules in which measurement errors enter in a multiplicative way. The usual strategy to deal with them consists of taking log-linear approximations of the equations to estímate. The expression to be estimated then includes a new error component and the estimators could be biased and inconsistent. We describe one particular parameterization that avoids linearizing the equation we want to estimate.

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    File URL: http://128.118.178.162/eps/get/papers/0312/0312004.pdf
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    Paper provided by EconWPA in its series General Economics and Teaching with number 0312004.

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    Length: 7 pages
    Date of creation: 15 Dec 2003
    Date of revision:
    Handle: RePEc:wpa:wuwpgt:0312004
    Note: Type of Document - pdf; prepared on win2000; to print on Hewlett Packard Laserjet; pages: 7; figures: 0. UPF Working Paper # 31 Newer version published in Economics Letters
    Contact details of provider: Web page: http://128.118.178.162

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    1. Runkle, David E., 1991. "Liquidity constraints and the permanent-income hypothesis : Evidence from panel data," Journal of Monetary Economics, Elsevier, vol. 27(1), pages 73-98, February.
    2. Stephen P. Zeldes, . "Consumption and Liquidity Constraints: An Empirical Investigation," Rodney L. White Center for Financial Research Working Papers 16-88, Wharton School Rodney L. White Center for Financial Research.
    3. MaCurdy, Thomas E, 1983. "A Simple Scheme for Estimating an Intertemporal Model of Labor Supply and Consumption in the Presence of Taxes and Uncertainty," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 24(2), pages 265-89, June.
    4. Altug, Sumru & Miller, Robert A, 1990. "Household Choices in Equilibrium," Econometrica, Econometric Society, vol. 58(3), pages 543-70, May.
    5. Browning, Martin & Deaton, Angus & Irish, Margaret, 1985. "A Profitable Approach to Labor Supply and Commodity Demands over the Life-Cycle," Econometrica, Econometric Society, vol. 53(3), pages 503-43, May.
    6. Joseph G. Altonji & Aloysius Siow, 1986. "Testing the Response of Consumption to Income Changes with (Noisy) PanelData," NBER Working Papers 2012, National Bureau of Economic Research, Inc.
    7. Robert E. Hall & Frederic S. Mishkin, 1980. "The Sensitivity of Consumption to Transitory Income: Estimates from Panel Data on Households," NBER Working Papers 0505, National Bureau of Economic Research, Inc.
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