Empirical evidence on the Euler equation for consumption in the US

Ascari, Guido; Magnusson, Leandro M.; Mavroeidis, Sophocles

doi:10.1016/j.jmoneco.2019.12.004

Cited by 24 publications

(44 citation statements)

References 51 publications

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“…Many other studies that use aggregate data find very small estimates for the intertemporal elasticity of substitution implying low sensitivity of consumption to changes in interest rate (see Hall, 1988;Barsky et al, 1997;Yogo, 2004; Havránek, 2015 among others). However, there is also some evidence for a larger elasticity estimate especially when incorporating rule-of-thumb consumers and accounting for weak instruments problem (for example, see Hahm, 1998;Ascari, Magnusson and Mavroeidis, 2016). In a paper related to ours in terms of addressing the issue of weak instruments in the estimation of consumption-income relationship, Ascari et al (2016) find that a baseline consumption Euler equation with a non-constant real interest does not capture 12 As shown by Campbell and Mankiw (1991), the model in the logarithmic form can be derived from the firstorder log-linear approximation of the consumption Euler equation under power utility.…”

Section: Conceptual Frameworkmentioning

confidence: 99%

“…However, there is also some evidence for a larger elasticity estimate especially when incorporating rule-of-thumb consumers and accounting for weak instruments problem (for example, see Hahm, 1998;Ascari, Magnusson and Mavroeidis, 2016). In a paper related to ours in terms of addressing the issue of weak instruments in the estimation of consumption-income relationship, Ascari et al (2016) find that a baseline consumption Euler equation with a non-constant real interest does not capture 12 As shown by Campbell and Mankiw (1991), the model in the logarithmic form can be derived from the firstorder log-linear approximation of the consumption Euler equation under power utility. An important consequence of using logs is that the parameter cannot be precisely interpreted as the fraction of rule-of-thumb consumers.…”

Section: Conceptual Frameworkmentioning

confidence: 99%

“…Stock and Yogo (2005) provide two alternative formal definitions of weak instruments. The first definition is based on the idea of limiting the relative bias of the IV estimator 13 Ascari et al (2016) estimate various extensions by incorporating habits, rule-of-thumb consumption, and wealth in the consumption Euler equation with non-constant interest rate. They find that these extensions better fit data but it is not possible to distinguish between them using aggregate data.…”

Section: Conceptual Frameworkmentioning

confidence: 99%

See 2 more Smart Citations

Estimating Excess Sensitivity and Habit Persistence in Consumption Using Greenbook Forecasts

2019

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In this paper, we revisit the issue of excess sensitivity of consumption to income and address the weak instrument problem that is well documented in this literature. Using quarterly data for the US economy, we first highlight the weak instrument problem by showing that the use of conventional instruments tends to overestimate the share of rule‐of‐thumb consumers. To address this weak instrument problem, we propose a new instrument for endogenous disposable income growth in the consumption function, namely, the Greenbook forecast of real disposable income growth. We show that this instrument encompasses the information contained in the conventional set of instruments, and is a superior predictor of income growth. We find that using our proposed instrument ameliorates the weak instrument problem and provides a much smaller estimate for the rule‐of‐thumb consumers. We also extend our empirical framework to allow for habit persistence and provide an estimate for this important parameter of the consumption function. Finally, we use a time‐varying specification of consumption function that allows for endogenous regressors, and document a decline in the share of rule‐of‐thumb consumers and a rise in the habit‐persistence parameter in the US over our sample period.

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Section: Conceptual Frameworkmentioning

confidence: 99%

Section: Conceptual Frameworkmentioning

confidence: 99%

Section: Conceptual Frameworkmentioning

confidence: 99%

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Estimating Excess Sensitivity and Habit Persistence in Consumption Using Greenbook Forecasts

2019

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“…Third, while completely uninformative weak-instrument-robust confidence intervals 2 are quite frequent in the empirical literature of the EIS for macro consumption data, - Yogo (2004), Ait-Sahalia, Parker, and Yogo (2004), Ascari, Magnusson, and Mavroeidis (2016) and Gomes and Paz (2013) -, this paper shows that unfiltered consumption can transform these impractical intervals into more plausible sets. For instance, Yogo (2004) found uninformative sets in 66 percent of specifications estimated with reported macro expenditures data for the US economy.…”

Section: Introductionmentioning

confidence: 73%

“…In addition to Yogo (2004), only a few papers address the subject. Ascari, Magnusson, and Mavroeidis (2016), Ait-Sahalia, Parker, and Yogo (2004), Gomes and Paz (2013) and J. C. Fuhrer and Rudebusch (2002) are examples, albeit the latter in a more macro-based framework.…”

Section: Introductionmentioning

confidence: 99%

Two Essays on Weak Identification in Macroeconomic Models

CASTRO¹

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First of all, I would like to thank my parents, who demonstrated and have been demonstrating plenty of patience, support and enthusiasm for everything that relates to my professional career. My mother deserves special emphasis. She did not abstain from encouraging any step of this research project, even though suffering from illness during most part of its confection. I have no words that could properly define her understanding with the situation, nor could I be completely clear on how thankful I am for every gesture she did in the last couple of years. Actions that seemed small to me at the time were probably immeasurable to her. I completely recognise her efforts now, and no doubts this paragraph falls short of my obligations as a son. It is still a transparent and humble way to express my feelings, though. I am grateful to my advisor, Carlos Carvalho, and to my co-advisor, Ruy Ribeiro. This dissertation would not have been possible without their guidance and fundamental contributions. I would like to thank Marcelo Medeiros for relevant collaboration and helpful insights during this work. I also thank João Issler and Marco Bonomo for important comments on this text, as well as Leonardo Rezende for an insightful discussion just after my workshop. I thank my colleagues and friends. Indeed, a few details of this work are a result of productive conversations. This study was partially financed by the Coordenação de Aperfeiçoamento Pessoal de Nível Superior-Brasil (CAPES)-Código de Financiamento 001. Financial support from PUC-Rio is also gratefully acknowledged.

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Empirical evidence on the Euler equation for investment in the US

Ascari,

Haque,

Magnusson

et al. 2024

J of Applied Econometrics

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SummaryIs the typical specification of the Euler equation for investment employed in dynamic stochastic general equilibrium (DSGE) models consistent with aggregate macro data? The answer is yes using state‐of‐the‐art econometric methods that are robust to weak instruments and exploit information in possible structural changes. Unfortunately, however, there is very little information about the values of the parameters in aggregate data because investment is unresponsive to changes in capital utilization and the real interest rate. Bayesian estimation using fully specified DSGE models is more accurate due to both informative priors and cross‐equation restrictions.

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Empirical evidence on the Euler equation for consumption in the US

Cited by 24 publications

References 51 publications

Estimating Excess Sensitivity and Habit Persistence in Consumption Using Greenbook Forecasts

Estimating Excess Sensitivity and Habit Persistence in Consumption Using Greenbook Forecasts

Two Essays on Weak Identification in Macroeconomic Models

Empirical evidence on the Euler equation for investment in the US

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