The aggregate Euler equation and transaction services of government bonds

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.