Estimating the Euler equation for output

New Keynesian macroeconomic models have generally emphasized that expectations of future output are a key factor in determining current output. The theoretical motivation for such forward-looking behavior relies on a straightforward generalization of the well-known Euler equation for consumption. In...

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Bibliographic Details
Published inJournal of monetary economics Vol. 51; no. 6; pp. 1133 - 1153
Main Authors Fuhrer, Jeffrey C., Rudebusch, Glenn D.
Format Journal Article
LanguageEnglish
Published Elsevier B.V 01.09.2004
Elsevier
SeriesJournal of Monetary Economics
Subjects
Euler equation
Monetary policy
Monetary policy
Euler equation
E1
C2
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Summary:New Keynesian macroeconomic models have generally emphasized that expectations of future output are a key factor in determining current output. The theoretical motivation for such forward-looking behavior relies on a straightforward generalization of the well-known Euler equation for consumption. In this paper, we use maximum likelihood and generalized method of moments (GMM) methods to explore the empirical importance of output expectations. We find little evidence that rational expectations of future output help determine current output, especially after taking into account the small-sample bias in GMM.
ISSN:0304-3932
1873-1295
DOI:10.1016/j.jmoneco.2003.10.004