Euler Equation: Estimation on Emerging Markets Data

Abstract

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 constraints so that the Euler equation for them does not hold. The estimation for lenders suffers from weak identification so that confidence intervals for parameters are wide and any meaningful interpretation is difficult. For consumers with loans, we show that the elasticity of intertemporal substitution (EIS) is significantly higher than zero. This result is robust to accounting for possible non-optimal behavior of consumers.