Changes in the output Euler equation and asset markets participation

Florin Bilbiie and Roland Straub

Journal of Economic Dynamics and Control, 2012, vol. 36, issue 11, 1659-1672

Abstract: Recent estimates of the output Euler equation for the United States indicate that the elasticity of aggregate demand to interest rates is not significantly different from zero. We first argue that this result may hide a structural break: the estimated elasticity is a convolution of two coefficients with opposite signs across the samples 1965–1979 and 1982–2003. The sign of the coefficient in the earlier sample is inconsistent with standard economic theory and intuition. We outline a model with limited asset markets participation that can generate this change in sign when asset market participation changes from low to high, and provide institutional evidence for such a change in the United States in the late 1970s and early 1980s.

Keywords: IS curve; Euler equation for output; Limited asset markets participation; Aggregate demand; Rule-of-thumb consumers (search for similar items in EconPapers)
JEL-codes: E31 E32 E44 E52 E58 G11 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (35)

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Working Paper: Changes in the Output Euler Equation and Asset Markets Participation (2012)
Working Paper: Changes in the Output Euler Equation and Asset Markets Participation (2012)
Working Paper: Changes in the Output Euler Equation and Asset Markets Participation (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:36:y:2012:i:11:p:1659-1672

DOI: 10.1016/j.jedc.2012.03.018

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