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Federal Reserve Bank of San Francisco
Working Paper Series
Estimating the Euler equation for output
Glenn D. Rudebusch
Jeffrey C. Fuhrer
Abstract

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.


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Glenn D. Rudebusch & Jeffrey C. Fuhrer, Estimating the Euler equation for output, Federal Reserve Bank of San Francisco, Working Paper Series 2002-12, 2002.
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Keywords: Consumption (Economics) ; Productivity
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