Intertemporal Consumption With Directly Measured Welfare Functions and Subjective Expectations

Abstract

Euler equation estimation of intertemporal consumption models imposes heavy demands on data and identifiability conditions. For example, one typically needs panel data on consumption, assumptions on expectations, and a parameterization of preferences. The authors aim at reducing some of these requirements, by using additional information on respondents' preferences and expectations. The results suggest that individually measured welfare functions and expectations have predictive power for the variation in consumption across households. Furthermore, estimates of the intertemporal elasticity of substitution based on the estimated welfare functions are plausible and of a similar order of magnitude as other estimates found in the literature.

Keywords: expectations, consumption, Euler equations

JEL Classification: D91, D84, D12