Work

Empirical evidence on the Euler equation for consumption in the US

Year: 2019

Type: article

Abstract: Recently developed econometric methods, that are robust to weak instruments and exploit information in possible structural changes, are applied to study the Euler equation for consumption using aggregate US post-war data. Several extensions to the baseline Euler equation model are investigated. The results are insensitive to using linear versus nonlinear specifications, different instruments or different consumption data, but they are very sensitive to asset returns. With risk-free returns, the elasticity of intertemporal substitution is tightly estimated around zero, while with stock market returns, it is significantly positive but very imprecisely estimated. There is no evidence of parameter instability.

Source: Journal of Monetary Economics

DOI: 10.1016/j.jmoneco.2019.12.004

Authors: Guido Ascari, Leandro M. Magnusson, Sophocles Mavroeidis

Institutions: University of Pavia, University of Oxford, The University of Western Australia

Language: English

Topic: Monetary Policy and Economic Impact

Subfield: General Economics, Econometrics and Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: hybrid

Estimated APC paid: $1,800

Funders: European Research Council, Australian Research Council, H2020 European Research Council