TY - JOUR
AU - Carroll,Christopher D.
TI - Death to the Log-Linearized Consumption Euler Equation! (And Very Poor Health to the Second-Order Approximation)
JF - National Bureau of Economic Research Working Paper Series
VL - No. 6298
PY - 1997
Y2 - December 1997
DO - 10.3386/w6298
UR - http://www.nber.org/papers/w6298
L1 - http://www.nber.org/papers/w6298.pdf
N1 - Author contact info:
Christopher D. Carroll
Department of Economics
Mergenthaler 441
Johns Hopkins University
Baltimore, MD 21218
Tel: 410/516-7602
Fax: 410/516-7600
E-Mail: ccarroll@jhu.edu
AB - This paper shows that standard empirical methods for estimating log-linearized consumption Euler equations cannot successfully uncover structural parameters like the coefficient of relative risk aversion from the dataset of simulated consumers behaving exactly according to the standard model. Furthermore, consumption growth for the simulated consumers is very highly statistically related to predictable income growth - and thus standard 'excess sensitivity' tests would reject the hypothesis that consumers are behaving according to the standard model. Results are not much better for the second-order approximation to the Euler equation. The paper concludes that empirical estimation of consumption Euler equations should not be abandoned, and discusses some alternative empirical strategies that are not subject to the problems of Euler equation estimation.
ER -