Econometrics & Applied Economics Seminar - Qazi Haque (University of Western Australia)

Title: Empirical Evidence on the Euler Equation in Open Economies

Abstract: We investigate the empirical evidence on the Euler equation models using aggregate data for a set of open economies, using methods that are robust to weak instruments and structural changes. We start with the conventional closed economy model and consider extensions that include habits and hand-to-mouth consumers. We then extend the analysis to allow for each country to behave like an open economy. We find that structural changes are informative for the identification of the Euler equation models in some countries. However, in all four countries, there is little responsiveness of output to changes in the interest rate and no evidence of parameter instability, but otherwise aggregate data provide little information to distinguish between alternative theoretical models.