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Estimation of Discount Factor and Coefficient of Relative Risk Aversion in Selected Countries

Waqas Ahmed, Adnan Haider () and Javed Iqbal ()
Additional contact information
Adnan Haider: Institute of Business Administration (IBA), Karachi

No 53, SBP Working Paper Series from State Bank of Pakistan, Research Department

Abstract: We estimate the long-run discount factor for a group of developed and developing countries through standard methodology incorporating adaptive expectations of inflation. We find that the discount factor of developing countries is relatively nearer to unity as compared to that of the developed countries. In the second part, while considering a standard Euler equation for household's inter-temporal consumption, we estimate the parameter of constant relative risk aversion (CRRA) for Pakistan by using the Generalized Method of Moments (GMM) approach. The resulting parameter value of CRRA conforms to the empirical range for developing countries (as given in, Cardenas and Carpenter, 2008) The GMM estimator for the discount factor reinforces its result from the first part of the paper. Consequently we show that different combination values for both the parameters result in different (in terms of magnitude) impulse response functions, in response to tight monetary policy shocks in a simple New Keynesian macroeconomic model.

Keywords: GMM; Discount factor; Coefficient of Relative Risk Aversion (search for similar items in EconPapers)
JEL-codes: C13 C61 C87 E23 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2012-07
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Working Paper: Estimation of Discount Factor ß and Coefficient of Relative Risk Aversion ? in Selected Countries (2012) Downloads
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