Euler Equation Estimation: Children and Credit Constraints

40 Pages Posted: 24 Oct 2014

Date Written: September 5, 2014

Abstract

I show that conventional estimators based on the consumption Euler equation, intensively used in studies of intertemporal consumption behavior, produce biased estimates of the effect of children on consumption if potentially binding credit constraints are ignored. As a more constructive contribution, I supply a tractable approach to obtaining bounds on the effect of children and estimate these bounds using the Panel Study of Income Dynamics (PSID). Results suggest that children might not affect household consumption in the same magnitude previously assumed.

Keywords: Consumption, Euler Equation Estimation, Credit Constraints, Children, Demographics, Life Cycle, Bounds

JEL Classification: D12, D14, D91

Suggested Citation

Jørgensen, Thomas, Euler Equation Estimation: Children and Credit Constraints (September 5, 2014). Available at SSRN: https://ssrn.com/abstract=2514185 or http://dx.doi.org/10.2139/ssrn.2514185

Thomas Jørgensen (Contact Author)

University of Copenhagen ( email )

Nørregade 10
Copenhagen, København DK-1165
Denmark

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