Estimating the Aggregate Consumption Euler Equation with State-Dependent Parameters

34 Pages Posted: 9 Feb 2011

See all articles by Haroon Mumtaz

Haroon Mumtaz

Bank of England; University of London - School of Sciences

Paolo Surico

London Business School - Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: February 2011

Abstract

The consumption Euler equation is a building block of modern macro theory. Yet, the existing evidence on aggregate data offers very conflicting results for the estimates of the degree of forward-lookingness and interest rate semi-elasticity. The disappointing performance can be rationalized by estimating an Euler equation in which the parameters are allowed to vary with the state of the economy. The nonlinear method reveals that during periods in which consumption is above its conditional average the estimates of the degree of forward-lookingness and interest rate semi-elasticity are significantly larger (in absolute value) than the estimates associated with periods of below-average consumption. Our evidence is consistent with models of state-dependence or heterogeneity in the discount factor and the elasticity of intertemporal substitution.

Keywords: aggregate consumption, Euler equation, heterogeneity, state-dependence

JEL Classification: E21, E32, E52

Suggested Citation

Mumtaz, Haroon and Mumtaz, Haroon and Surico, Paolo, Estimating the Aggregate Consumption Euler Equation with State-Dependent Parameters (February 2011). CEPR Discussion Paper No. DP8233, Available at SSRN: https://ssrn.com/abstract=1758443

Haroon Mumtaz (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

University of London - School of Sciences ( email )

London, WC1E 7HX
United Kingdom

Paolo Surico

London Business School - Department of Economics ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

HOME PAGE: http://sites.google.com/site/paolosurico

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

HOME PAGE: http://sites.google.com/site/paolosurico

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
7
Abstract Views
725
PlumX Metrics