CentER Discussion Paper Series No. 2008-85
30 Pages Posted: 8 Oct 2008 Last revised: 26 Aug 2010
Date Written: October 7, 2008
Euler equation estimation of intertemporal consumption models requires many, often unverifiable assumptions. These include assumptions on expectations and preferences. We aim at reducing some of these requirements by using direct subjective information on respondents' preferences and expectations. The results suggest that individually measured welfare functions and expectations have predictive power for the variation in consumption across households. Furthermore, estimates of the intertemporal elasticity of substitution based on the estimated welfare functions are plausible and of a similar order of magnitude as other estimates found in the literature. The model favored by the data only requires cross-section data for estimation.
Keywords: Expectations, Consumption, Euler equations
JEL Classification: D91, D84, D12
Suggested Citation: Suggested Citation
Kapteyn, Arie and Kleinjans, Kristin J. and van Soest, Arthur, Intertemporal Consumption with Directly Measured Welfare Functions and Subjective Expectations (October 7, 2008). CentER Discussion Paper Series No. 2008-85. Available at SSRN: https://ssrn.com/abstract=1280758 or http://dx.doi.org/10.2139/ssrn.1280758