The Double Power Law in Consumption and Implications for Testing Euler Equations

Alexis Akira Toda and Kieran Walsh

University of California at San Diego, Economics Working Paper Series from Department of Economics, UC San Diego

Abstract: We provide evidence suggesting that the cross-sectional distributions of US consumption and its growth rate obey the power law in both the upper and lower tails, with exponents approximately equal to four. Consequently, high-order moments are unlikely to exist, and the generalized method of moments estimation of Euler equations that employs cross-sectional moments may be inconsistent. Through bootstrap studies, we find that the power law appears to generate spurious nonrejection of heterogeneous-agent asset pricing models in explaining the equity premium. Dividing households into age groups, we propose an estimation approach that appears less susceptible to fat tail issues.

Keywords: Economics; Commerce; Management; Tourism and Services (search for similar items in EconPapers)
Date: 2015-10-01
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Citations: View citations in EconPapers (78)

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Journal Article: The Double Power Law in Consumption and Implications for Testing Euler Equations (2015)
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