The aggregate Euler equation and transaction services of government bonds
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Date
2012-11-16
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Abstract
We estimate an aggregate consumption Euler equation on a panel of
OECD countries allowing for the stocks of government bonds to influence the intertemporal
path of private consumption. The results can be interpreted as mildly
supportive of recently proposed theories which postulate that government bonds
have a liquidity value due to their role in facilitating transactions. We also allow
for non-separability between consumption and leisure in utility in a way that distinguishes
between the extensive and the intensive margin of employment. The relation
between expected changes in consumption and employment at the extensive margin
turns out as the most robust feature of the data, while the intensive margin appears
to be of limited importance.
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Keywords
crosssectional dependence, dynamic panel, Euler equation, liquidity, non-separable utility