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The moment restrictions for the durable consumption model with recursive utility revisited

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  • Okubo, Masakatsu

Abstract

A key assumption behind the moment restrictions for the durable consumption model with recursive utility is that a condition called normalization holds for the intertemporal marginal rate of substitution. This paper points out that one of the moment restrictions used in the literature is inconsistent with the assumption that this condition and the first-order conditions hold simultaneously. It shows that a two-step estimation procedure can avoid this issue. The method is illustrated with US data.

Suggested Citation

  • Okubo, Masakatsu, 2023. "The moment restrictions for the durable consumption model with recursive utility revisited," Finance Research Letters, Elsevier, vol. 52(C).
    • Handle: RePEc:eee:finlet:v:52:y:2023:i:c:s1544612322006304
    DOI: 10.1016/j.frl.2022.103453
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    References listed on IDEAS

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    More about this item

    Keywords

    Durable good; Euler equation; Moment restriction; Nonseparable utility;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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