Identification Robust Empirical Evidence on the Euler Equation in Open Economies
32 Pages Posted: 11 Feb 2020
Date Written: January 30, 2020
We investigate the empirical evidence on the Euler equation models using methods that are robust to weak instruments and structural changes for a set of eight countries. 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 countries, there is limited responsiveness of output to changes in the interest rate and no evidence of parameter instability, but otherwise aggregate data provide limited information to learn about Euler equation models.
Keywords: Euler equation, Weak identification, Open economy
JEL Classification: C1, C2, E1, F4
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