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52
Death to the LogLinearized Consumption Euler Equation! (And Very Poor Health to the SecondOrder Approximation)
, 1997
"... This paper shows that standard empirical methods for estimating loglinearized consumption Euler equations cannot successfully uncover structural parameters like the coe#cient of relative risk aversion from a dataset of simulated consumers behaving exactly according to the standard model. Furthermor ..."
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Cited by 36 (1 self)
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This paper shows that standard empirical methods for estimating loglinearized consumption Euler equations cannot successfully uncover structural parameters like the coe#cient of relative risk aversion from a 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 secondorder approximation to the Euler equation. The paper concludes that empirical estimation of consumption Euler equations should be abandoned, and discusses some alternative empirical strategies that are not subject to the problems of Euler equation estimation. Keywords: Euler equation, uncertainty, consumption, excess sensitivity JEL Classification Codes: C6, D91, E21 + Department of Economics, John...
House Prices, and Collateral Constraints: A Structural Econometric Analysis
 Journal of Housing Economics
"... participants at the Chinese University of Hong Kong and the SED 2004 meetings for comments and suggestions. If borrowing capacity of indebted households is tied to the value of their home, house prices should enter a correctly specified aggregate Euler equation for consumption. I develop a simple tw ..."
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Cited by 16 (0 self)
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participants at the Chinese University of Hong Kong and the SED 2004 meetings for comments and suggestions. If borrowing capacity of indebted households is tied to the value of their home, house prices should enter a correctly specified aggregate Euler equation for consumption. I develop a simple twoagent, dynamic general equilibrium model in which home (collateral) values affect debt capacity and consumption possibilities for a fraction of the households. I then derive and estimate an aggregate consumption Euler equation, and estimate its structural parameters. The results provide robust support for housing prices as a driving force of consumption fluctuations.
A Model of the Consumption Response to Fiscal Stimulus Payments *
, 2011
"... A widebody of empirical evidence, based on randomized experiments, findsthat 2040 percent of fiscal stimulus payments (e.g. tax rebates) are spent on nondurable household consumption in the quarter that they are received. We develop a structural economic model to interpret this evidence. Our model ..."
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Cited by 11 (1 self)
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A widebody of empirical evidence, based on randomized experiments, findsthat 2040 percent of fiscal stimulus payments (e.g. tax rebates) are spent on nondurable household consumption in the quarter that they are received. We develop a structural economic model to interpret this evidence. Our model integrates the classical BaumolTobin model of money demand into the workhorse incompletemarkets lifecycle economy. In this framework, households can hold two assets: a lowreturn liquid asset (e.g., cash, checking account) and a highreturn illiquid asset (e.g., housing, retirement account) that carries atransaction cost. Theoptimal lifecyclepatternofwealth accumulation impliesthatmanyhouseholds are “wealthy handtomouth”: they hold little or no liquid wealth despite owning sizeable quantities of illiquid assets. They therefore display large propensities to consume out of additional income. We document the existence of such households in data from the Survey of Consumer Finances. A version of the model parameterized to the 2001 tax rebate episode is able to generate consumption responses to fiscal stimulus payments that are in line with the data.
857 “Housing and equity wealth effects of Italian households” by
, 2008
"... In 2008 all ECB publications feature a motif taken from the 10 banknote. This paper can be downloaded without charge from ..."
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In 2008 all ECB publications feature a motif taken from the 10 banknote. This paper can be downloaded without charge from
BufferStockTheory.tex Theoretical Foundations of Buffer Stock Saving
, 2009
"... “Bufferstock ” versions of the dynamic stochastic optimizing model of saving are now standard in the consumption literature. This paper builds theoretical foundations for rigorous understanding of the main features of buffer stock models, including the existence of a target level of cashtopermane ..."
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Cited by 8 (1 self)
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“Bufferstock ” versions of the dynamic stochastic optimizing model of saving are now standard in the consumption literature. This paper builds theoretical foundations for rigorous understanding of the main features of buffer stock models, including the existence of a target level of cashtopermanentincome ratio and the proposition that aggregate consumption growth equals aggregate income growth in a small open economy populated by buffer stock consumers.
Soft liquidity constraints and precautionary savings’, Bank of England Working Paper no
, 2000
"... those of the Bank of England or Monetary Policy Committee members. Ideas for this paper ..."
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Cited by 8 (1 self)
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those of the Bank of England or Monetary Policy Committee members. Ideas for this paper
Precautionary saving and portfolio allocation: DP by GMM
, 2001
"... There is much research on consumptionsavings problems with risky labor income and a constant interest rate and also on portfolio allocation with risky returns but nonstochastic labor income. Less is known quantitatively about the interaction between the two forms of risk. Under CRRA utility, undive ..."
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Cited by 7 (0 self)
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There is much research on consumptionsavings problems with risky labor income and a constant interest rate and also on portfolio allocation with risky returns but nonstochastic labor income. Less is known quantitatively about the interaction between the two forms of risk. Under CRRA utility, undiversifiable income risk should be reflected in both savings rates and portfolio allocations. To quantify these effects in a model of consumption and portfolio choice, we adopt a semiparametric projection method for solving dynamic programmes, based on generalized method of moments estimation of the parameters of approximate decision rules. We find that background income risk does affect optimal portfolios but that this effect may be difficult to detect empirically. Keywords: portfolio theory, precautionary saving JEL classification: D91, G11, C63 * Corresponding author, Email: smithgw@qed.econ.queensu.ca We thank the Social Sciences and Humanities Research Council of Canada for support o...
Buffer Stock Saving: Some Theory
, 1996
"... The purpose of this note is to lay out the theoretical foundations for some basic properties of a bufferstock model of household saving behavior, which Carroll (1996) argues is a good model for the behavior of the typical U.S. household. The note proceeds in three parts. The first part states the m ..."
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Cited by 6 (5 self)
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The purpose of this note is to lay out the theoretical foundations for some basic properties of a bufferstock model of household saving behavior, which Carroll (1996) argues is a good model for the behavior of the typical U.S. household. The note proceeds in three parts. The first part states the maximization problem, demonstrates that the problem can be rewritten in terms of ratios of variables to permanent income, and proves that the problem defines a contraction mapping for the optimal consumption rule. The second part of the note presents a figure which illustrates graphically five important properties of bufferstock saving. First, as wealth approaches infinity the expected growth rate of consumption and the marginal propensity to consume converge to their values in the certainty case. Second, as assets approach zero the expected growth rate of consumption approaches infinity. Third, there is a target grosswealthtoincome ratio x such that if xt = x then Et~xt+1 = xt. Fourth, at the target gross wealth ratio, the expected growth rate of consumption is slightly less than the expected growth rate of permanent labor income. Finally, the expected growth rate of consumption is declining
Equilibrium consumption and precautionary savings in a stochastically growing economy
 JOURNAL OF ECONOMIC DYNAMICS AND CONTROL
, 2004
"... The derivation of a closedform solution for consumption based on the constant elasticity utility function in the presence of stochastic labor income has proved to be intractable. This paper derives a closedform equilibrium relationship between consumption and wealth, one that holds along a balance ..."
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The derivation of a closedform solution for consumption based on the constant elasticity utility function in the presence of stochastic labor income has proved to be intractable. This paper derives a closedform equilibrium relationship between consumption and wealth, one that holds along a balanced growth path in a stochastic Romer endogenous growth model. By employing more general recursive preferences, we can disentangle the coefficient of relative risk aversion from the intertemporal elasticity of substitution. The effects of key structural parameters on equilibrium consumption and its tradeoff with leisure are analyzed. A significant aspect of our analysis concerns the extent to which current risk in the economy is shared between labor and capital. This plays an important role in determining the impact of risk on the economy in general, and on consumption in particular. Formal analysis is supplemented with extensive numerical simulations.