Estimating the Euler Equation for Output

By Glenn D. Rudebusch, Jeffrey C. Fuhrer. 2002

299 citations recorded by the source corpus.

New Keynesian macroeconomic models have generally emphasized that expectations of future output are a key factor in determining current output. The theoretical motivation for such forward-looking behavior relies on a straightforward generalization of the well-known Euler equation for consumption. In this paper, we use maximum likelihood and generalized method of moments (GMM) methods to explore the empirical importance of output expectations. We find little evidence that rational expectations of future output help determine current output, especially after taking into account the small-sample bias in GMM.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/2e1d2a81058b1efcdc9082252378a581ecc90c4b

How researchers see this paper

The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.

In Economics and Econometrics

Citations in the corpus

On the Indeterminacy of New-Keynesian Economics (2004, methodology): “The standard new-Keynesian Phillips curve is purely forward looking but Jeffrey Fuhrer [7] has argued that forward looking behavior is unimportant in empirical models of the price process and Jeffrey Fuhrer and Glen Rudebusch [10] claim that forward looking models of the new-Keynesian IS curve also ”
Intrinsic and Inherited Inflation Persistence (2005, unknown): “The estimates of the “forward-looking” and “backward-looking” parameters vary considerably; in other work we address the difficulties in obtaining reliable estimates of these parameters via GMM as conventionally implemented (Fuhrer and Rudebusch 2004; Fuhrer and Olivei 2004).”
A MACRO-FINANCE MODEL OF THE TERM STRUCTURE, MONETARY POLICY AND THE ECONOMY* (2003, background): “The macroeconomic interpretation of this latter effect is that an increase in the perceived inflation target must be associated with an easing of monetary conditions so inflation can rise to its new target.(23) Given some persistence in inflation, easier monetary conditions (lower real rates) requir”
Policy mix and debt sustainability: evidence from fiscal policy rules (2006, background): “GMM estimation suffers from different flaws, however (Fuhrer and Rudebusch 2002).”
A Survey of Weak Instruments and Weak Identification in Generalized Method of Moments (2002, background): “Other macroeconomic applications that confront weak identi cation include estimates of New Keynesian output equations (Fuhrer and Rudebusch 2002) and some structural vector autoregressions (Pagan and”
Assessing the Lucas Critique in Monetary Policy Models (2002, methodology): “For example, Fuhrer (1997) estimates µπ to be about 0, Rudebusch (2002a) estimates µπ 0.3, while Fuhrer and Moore (1995) assume µπ 0.5.”
A Small-Sample Study of the New-Keynesian Macro Model (2006, unknown): “Fuhrer and Rudebusch (2004) have recently analyzed the small-sample properties of the parameters in the IS equation through a Monte-Carlo exercise.”
Monetary Policy Inertia: Fact or Fiction? (2006, unknown): “…and μr set equal to zero matches the completely adaptive expectations model of Rudebusch and Svensson (1999) and Rudebusch (2001), which has had some success in approximating the time series data in the manner of a small estimated VAR (see Estrella and Fuhrer, 2002, and Fuhrer and Rudebusch, 2004).”
Consumption, House Prices and Collateral Constraints: a Structural Econometric Analysis (2004, background): “Some studies (for instance Fuhrer and Rudebusch, 2004) have recently criticized the standard consumption Euler equation on ground that it implies " too much " forward-looking behavior.”