Death to the Log-Linearized Consumption Euler Equation! (And Very Poor Health to the Second-Order Approximation)

Unknown author

148 citations0/0 files storedTopics in Macroeconomics

No readable copy stored yet — this record is metadata only.

No open-access location is known for this record yet.

Literature note Cite in a project Citation map

Monetary Policy and Economic Impact Financial Literacy, Pension, Retirement Analysis Economic theories and models

Abstract

Abstract This paper shows that standard methods for estimating log-linearized consumption Euler equations using micro data 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 the 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 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.

Paper brief

Loading…

Cite this work

Citation unavailable for this work.

BibTeX RIS CSL-JSON

No public copy is stored for this record, so only the metadata is cited.

Citations in this library

Citation map →

Stored only when both papers are in the corpus — 148 citations exist upstream.

References

1978Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence 1997Preference Parameters and Behavioral Heterogeneity: An Experimental Approach in the Health and Retirement Study 2002Consumption Over the Life Cycle 1989Consumption, Income, and Interest Rates: Reinterpreting the Time Series Evidence 1992The Buffer-Stock Theory of Saving: Some Macroeconomic Evidence 1991Poverty and the Rate of Time Preference: Evidence from Panel Data 1989Optimal Consumption with Stochastic Income: Deviations from Certainty Equivalence 1997The nature of precautionary wealth

Cited by

2003Estimating Euler equations 2006Does job insecurity affect household consumption?2016Do Consumers Really Follow a Rule of Thumb? Three Thousand Estimates from 130 Studies Say 'Probably Not'2009Estimating Panel Models With Internal and External Habit Formation 2002Consumption Over the Life Cycle: Some Facts from Consumer Expenditure Survey Data

Explore the map →

Papers that cite the same references — the relational fallback while embeddings are still backfilling.

Imported from OpenAlex (CC0) — nothing here is generated.