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Euler Equation Estimation: Children and Credit Constraints

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  • Thomas Høgholm Jørgensen

    (Department of Economics, Copenhagen University)

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.

Suggested Citation

  • Thomas Høgholm Jørgensen, 2014. "Euler Equation Estimation: Children and Credit Constraints," Discussion Papers 14-25, University of Copenhagen. Department of Economics.
    • Handle: RePEc:kud:kuiedp:1425
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    References listed on IDEAS

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    More about this item

    Keywords

    Consumption; Euler Equation Estimation; Credit Constraints; Children; Demographics; Life Cycle; Bounds;
    All these keywords.

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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