We show that three factors combine to explain the mean excess sensitivity reported in studies estimating consumption Euler equations: the use of macro data, publication bias, and liquidity constraints. When micro data are used, publication bias is corrected for, and the households under...

Previous tests for liquidity constraints using consumption Euler equations have frequently split the sample on the basis of wealth arguing that low wealth consumers are more likely to be constrained. We propose alternative tests using different and more direct information on borrowing...

We address the issue of estimating the Euler equation for emerging markets. Using panel data for Russian households, we show that accounting for consumer type and income level is crucial. Consumers, who have neither savings nor loans, as well as consumers with low income, face liquidity...

This paper derives and estimates an aggregate Euler consumption equation which allows one to compare the importance of collateral constraints and non-separability of consumption and leisure as alternative sources of excess sensitivity of consumption to current income. Estimation results suggest...

This paper shows that the consumption-based asset pricing model (C-CAPM) with low-probability disaster risk rationalizes large pricing errors, i.e., Euler equation errors. This result is remarkable, since Lettau and Ludvigson (2009) show that leading asset pricing models cannot explain sizeable...

We provide evidence that households discretize their inflation expectations so that what matters for durable consumption decisions is the broad inflation regime they expect. Using survey data, we document that a large share of the adjustment in the average inflation expectation comes from the...

In this paper, we first provide a brief exposition of the simplest version of the selfish life cycle model or hypothesis, which is undoubtedly the most widely used theoretical model of household behavior in economics, and then survey the literature on household saving behavior in Japan (with...

Economists working with numerical solutions to the optimal consumption/saving problem under uncertainty have long known that there are quantitatively important interactions between liquidity constraints and precautionary saving behavior This paper provides the analytical basis for those...

This paper considers the implications for consumption and saving behaviour when households are allowed to borrow, but face penalties which increase with the amount borrowed. It shows that the introduction of this type of constraints (soft liquidity constraints) does not lead to consumers...

Estimates of Frisch labor-supply elasticities are biased in the presence of borrowing constraints. We show that this estimation bias is less pronounced for secondary than for primary earners. The reason is that, in households with two earners and joint borrowing constraints, wage-rate...