Approximation bias in linearized Euler equations

• 成果类型: Article
• 署名作者: Ludvigson, S; Paxson, CH
• 署名单位: Federal Reserve System - USA; Federal Reserve Bank - New York; Princeton University
• 刊物名称: REVIEW OF ECONOMICS AND STATISTICS
• ISSN/ISSBN: 0034-6535
• DOI: 10.1162/00346530151143789
• 发表日期: 2001-05
• 页码: 242-256
• 关键词: time-series; consumption; income; earnings; GROWTH; MODEL

摘要

A wide range of empirical applications rely on linear approximations to dynamic Euler equations. Among the most notable of these is the large and growing literature on precautionary saving that examines how consumption growth and saving behavior are affected by uncertainty and prudence. Linear approximations to Euler equations imply a linear relationship between expected consumption growth and uncertainty in consumption growth, with a slope coefficient that is a function of the coefficient of relative prudence. This literature has produced puzzling results: estimates of the coefficient of relative prudence land the coefficient of relative risk aversion) from linear regressions of consumption growth on uncertainty in consumption growth imply estimates of prudence and risk aversion that are unrealistically low. Using numerical solutions to a fairly standard intertemporal optimization problem, our results show that the actual relationship between expected consumption growth and uncertainty in consumption growth differs substantially from the relationship implied by a linear approximation. We also present Monte Carlo evidence that shows that the instrumental-variables methods that are commonly used to estimate the parameters correct some, but not all, of the approximation bias.