Ahmed, Waqas and Haider, Adnan and Iqbal, Javed (2012): Estimation of discount factor (beta) and coefficient of relative risk aversion (gamma) in selected countries.

PDF
MPRA_paper_39736.pdf Download (522Kb)  Preview 
Abstract
We estimate the longrun discount factor for a group of developed and developing countries through standard methodology incorporating adaptive expectations of inflation. We find that the discount factor of developing countries is relatively nearer to unity as compared to that of the developed countries. In the second part, while considering a standard Euler equation for household's intertemporal consumption, we estimate the parameter of constant relative risk aversion (CRRA) for Pakistan by using the Generalized Method of Moments (GMM) approach. The resulting parameter value of CRRA confirms to the empirical range for developing countries (as given in, Cardenas and Carpenter, 2008). The GMM estimator for the discount factor reinforces its result from the first part of the paper. Consequently we show that different combination values for both the parameters result in different (in terms of magnitude) impulse response functions, in response to tight monetary policy shocks in a simple New Keynesian macroeconomic model.
Item Type:  MPRA Paper 

Original Title:  Estimation of discount factor (beta) and coefficient of relative risk aversion (gamma) in selected countries 
Language:  English 
Keywords:  Discount Factor; Risk Aversion; Euler Equation; GMM 
Subjects:  C  Mathematical and Quantitative Methods > C1  Econometric and Statistical Methods and Methodology: General > C13  Estimation: General D  Microeconomics > D9  Intertemporal Choice and Growth > D91  Intertemporal Consumer Choice; Life Cycle Models and Saving E  Macroeconomics and Monetary Economics > E2  Macroeconomics: Consumption, Saving, Production, Employment, and Investment > E21  Consumption; Saving; Wealth 
Item ID:  39736 
Depositing User:  Adnan Haider Adnan 
Date Deposited:  29. Jun 2012 12:40 
Last Modified:  13. Feb 2013 04:15 
References:  Alan, S. and M. Browning (2006). Estimating Intertemporal Allocation Parameters Using Simulated Residual Estimation, Working Paper No. 284, Economics Working Papers Series, Department of Economics, University of Oxford. Amemiya, T. (1985). Instrumental Variable Estimator for the nonlinear ErrorsinVariables model, Journal of Econometrics, 28(3), 273289. Attanasio, O. P. and H. Low (2004). Estimating Euler Equations, Review of Economic Dynamics, 7, 405435. Brock, William A. (1982). Asset Prices in a Production Economy, In the Economics of information and uncertainty, edited by John J. McCall. Chicago: Univ. Chicago Press. Cardenas, J. C. and Carpenter, J. P. (2008). Behavioral development economics: Lessons from field labs in developing countries, Journal of Development Studies, 44(3), 311328. Epstein, L.G. and S.E. Zin (1991). Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: An Empirical Analysis. Journal of Economic Theory, 99(2): 263286. Fisher, I. (1930). The Theory of Interest, New York: Macmillan. Fuhrer, J.C., Moore, G.R., Schuh, S.D. (1995). Estimating the linearquadratic inventory model: maximum likelihood versus Generalized Method of Moments. Journal of Monetary Economics, 35: 115  157. Gali, J. (2008). Monetary Policy, Inflation and the Business Cycle, Princeton University Press. Goldin, J. (2007). Making Decisions about the Future: The DiscountedUtility Model. Mind Matters: The Wesleyan Journal of Psychology, 2: 4956. Hall, R. E., (1978). Stochastic Implications of the Life CyclePermanent Income Hypothesis: Theory and Evidence, Journal of Political Economy, 86: 971987. Hall, R. E., (1988). Intertemporal substitution in consumption. Journal of Political Economy, 96: 339357. Hansen, L.P., (1982). Large Sample Properties of Generalized Method of Moments Estimators. Econometrica, 50: 10291054. Hansen, L. P. and T. J. Sargent (1980). Formulating and Estimating Dynamic Linear Rational Expectations, Journal of Economic Dynamics and Control, Vol. 2, 746. Hansen, L.P. and K.J. Singleton (1982). Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations Models, Econometrica. 50: 12691286. Hansen, L.P. and K.J. Singleton (1984). Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations Models: Errata, Econometrica. 52: 267268. Hansen, L.P., Heaton, J., Yaron, A.(1996). Finite sample properties of some alternative GMM estimators. Journal Business and Economics Statistics, 14: 262280. Hansen, L.P. and K.J. Singleton (1996). Efficient Estimation of Linear Asset Pricing Models with MovingAverage Errors, Journal of Business and Economic Statistics, 14: 5368. Holt, C. A. and Laury, S. K. (2002). Risk aversion and incentive effects, American Economic Review, 92: 16441655. Kocherlakota, N.R. (1990). On tests of representative consumer asset pricing models, Journal of Monetary Economics, 26: 285304. Lucas, R.E. Jr. and T. J. Sargent (1981). Linear Rational Expectations Models for Dynamically Interrelated Variables, in Rational Expectation and Economic Practice, ed. Minneapolis: University of Minnesota Press. Murat T. (2006). Aggregate Consumption and the Risk Free Rates in Turkey: An Empirical Analysis Sosyal Bilimler Dergisi. Mao, C. (1990). Hypothesis testing and finite sample properties of Generalized Method of Moments estimators: a Monte Carlo study, Working Paper 9012, Federal Reserve Bank of Richmond. Ogaki, M., Reinhart, C.M. (1998). Measuring intertemporal substitution: the role of durable goods. Journal of Political Economy, 106: 10781098. Pozzi, L. (2003). The coefficient of relative risk aversion: A Monte Carlo study investigating small sample estimator problems, Economic Modeling, 20: 923940. Walsh, C. E. (2010). Monetary Theory and Policy, 3rd Ed., MIT Press. 
URI:  http://mpra.ub.unimuenchen.de/id/eprint/39736 