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SEPARABILITY, AGGREGATION, AND EULER EQUATION ESTIMATION

Published online by Cambridge University Press:  16 January 2001

Adrian R. Fleissig
Affiliation:
California State University at Fullerton
A. Ronald Gallant
Affiliation:
University of North Carolina at Chapel Hill
John J. Seater
Affiliation:
North Carolina State University

Abstract

We derive a seminonparametric utility function containing theconstant relative risk aversion (CRRA) function as a special case,and we estimate the associated Euler equations with U.S. consumptiondata. There is strong evidence that the CRRA function ismisspecified. The correctly specified function includes laggedeffects of durable goods and perhaps nondurable goods, is bounded asrequired by Arrow's Utility Boundedness Theorem, and has a positiverate of time preference. Constraining sample periods and separabilitystructure to be consistent with the generalized axiom of revealedpreference affects estimation results substantially. Using Divisiaaggregates instead of the NIPA aggregates also affects results.

Information

Type
Research Article
Copyright
© 2000 Cambridge University Press

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