TY - JOUR
AU - Garber,Peter M.
AU - King,Robert G.
TI - Deep Structral Excavation? A Critique of Euler Equation Methods
JF - National Bureau of Economic Research Technical Working Paper Series
VL - No. 31
PY - 1983
Y2 - November 1983
DO - 10.3386/t0031
UR - http://www.nber.org/papers/t0031
L1 - http://www.nber.org/papers/t0031.pdf
N1 - Author contact info:
Peter M. Garber
2245 N. Southwinds Blvd.
#203
Vero Beach, FL 32963
Tel: 904/5205330
E-Mail: peter.garber@db.com
Robert King
Department of Economics
Boston University
270 Bay State Road
Boston, MA 02215
Tel: 617/353-5941
E-Mail: rking@bu.edu
AB - Rational expectations theory instructs empirical researchers to uncover the values of 'deep' structural parameters of preferences and technology rather than the parameters of decision rules that confound these structural parameters with those of forecasting equations. This paper reevaluates one method of identifying and estimating such deep parameters, recently advanced by Hansen and Singleton, that uses intertemporal efficiency expressions (Euler equations) and basic properties of expectations to produce orthogonality conditions that permit parameter estimation and hypothesis testing. These methods promise the applied researcher substantial freedom, as it is apparently not necessary to specify the details of dynamic general equilibrium to study the behavior of a particular market participant. In this paper, we demonstrate that this freedom is illusory. That is, if there are shifts in agents' objectives which are not directly observed by the econometrician, then Euler equation methods encounter serious identification and estimation difficulties. For these difficulties to be overcome the econometrician must have prior knowledge concerning variables that are exogenous to the agent under study, as in conventional simultaneous equations theory.
ER -