02552cam a22003017 4500001000600000003000500006005001700011006001900028007001500047008004100062100002500103245006700128260006600195300005700261490005100318500001400369520132700383530006001710538007201770538003601842588002501878690012901903700001702032710004202049830008602091856003702177856003602214t0253NBER20200227164857.0m o d cr cnu||||||||200227s2000 mau fo 000 0 eng d1 aAttanasio, Orazio P.10aEstimating Euler Equations /cOrazio P. Attanasio, Hamish Low. aCambridge, Mass.bNational Bureau of Economic Researchc2000. a1 online resource:billustrations (black and white);1 aNBER technical working paper seriesvno. t0253 aMay 2000.3 aIn this paper we consider conditions under which the estimation of a log-linearized Euler equation for consumption yields consistent estimates of the preference parameters. When utility is isoelastic and a sample covering a long time period is available, consistent estimates are obtained from the log-linearized Euler equation when the innovations to the conditional variance of consumption growth are uncorrelated with the instruments typically used in estimation. We perform a Montecarlo experiment, consisting in solving and simulating a simple life cycle model under uncertainty, and show that in most situations, the estimates obtained from the log-linearized equation are not systematically biased. This is true even when we introduce heteroscedasticity in the process generating income. The only exception is when discount rates are very high (47% per year). This problem arises because consumers are nearly always close to the maximum borrowing limit: the estimation bias is unrelated to the linearization. Finally, we plot life cycle profiles for the variance of consumption growth, which, except when the discount factor is very high, is remarkably flat. This implies that claims that demographic variables in log-linearized Euler equations capture changes in the variance of consumption growth are unwarranted. aHardcopy version available to institutional subscribers aSystem requirements: Adobe [Acrobat] Reader required for PDF files. aMode of access: World Wide Web.0 aPrint version record 7aE2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy2Journal of Economic Literature class.1 aLow, Hamish.2 aNational Bureau of Economic Research. 0aTechnical Working Paper Series (National Bureau of Economic Research)vno. t0253.40uhttp://www.nber.org/papers/t025340uhttp://dx.doi.org/10.3386/t0253