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

Christopher Carroll

No 6298, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper shows that standard empirical methods for estimating log-linearized consumption Euler equations cannot successfully uncover structural parameters like the coefficient of relative risk aversion from the 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 standard 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 not be abandoned, and discusses some alternative empirical strategies that are not subject to the problems of Euler equation estimation.

JEL-codes: C6 D91 (search for similar items in EconPapers)
Date: 1997-12
Note: EFG ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (33)

Published as Advances in Macroeconomics, (B.E. Journal of Macroeconomics), November 2001, Vol. 1, no. 1, Article 6

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Journal Article: Death to the Log-Linearized Consumption Euler Equation! (And Very Poor Health to the Second-Order Approximation) (2001)
Software Item: Mathematica code for Death to the Log-Linearized Consumption Euler Equation! (2001)
Working Paper: Death to the Log-Linearized Consumption euler Equation! (And Very Poor Health to the Second-Order Approximation) (1997)
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