In this paper we exploit the specific structure of the Euler equation and develop two alternative GMM estimators that deal explicitly with measurement error. The first estimator assumes that the measurement error is log-normally distributed. The second estimator drops the distributional assumption at the cost of less precision. Our Monte Carlo results suggest that both proposed estimators perform much better than conventional alternatives based on the exact Euler equation or its log-linear approximation, especially with short panels. An empirical application to the PSID yields plausible and precise estimates of the coefficient of relative risk aversion and the discount rate.
Authors
CPP Co-Director
Orazio is an International Research Fellow at the IFS, a Professor at Yale and a Research Associate at the National Bureau of Economic Research.
Research Associate University of Copenhagen
Martin is an IFS Research Associate, a Nuffield Senior Research Fellow and a Professor of Economics at the University of Oxford.
Sule Alan
Journal article details
- DOI
- 10.1002/jae.1037
- Publisher
- Wiley
- Issue
- Volume 24, Issue 2, September 2008
Suggested citation
S, Alan and O, Attanasio and M, Browning. (2008). 'Estimating Euler Equations with Noisy Data: Two Exact GMM Estimators' 24, Issue 2(2008)
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