tag:blogger.com,1999:blog-5624436327404149621.post2036285444933382643..comments2024-03-28T20:07:31.640-07:00Comments on Quantitative Ease by Carola Binder: On Euler EquationsCarolahttp://www.blogger.com/profile/12783977056485775882noreply@blogger.comBlogger1125tag:blogger.com,1999:blog-5624436327404149621.post-62045706809698093942014-01-16T14:38:57.758-08:002014-01-16T14:38:57.758-08:00I see Nick Rowe already made essentially this comm...I see Nick Rowe already made essentially this comment on Noah's blog, but perhaps it kind of gets lost in the multiplicity of comments, so I'll say it here. My immediate thought when hearing that empirical studies find the wrong correlation for Euler equations is that there is an identification problem. The studies Noah cites, I presume, make (implicitly or explicitly) the identifying assumption that preferences are constant over time. But if shocks to preferences (and specifically to the time preference parameter) are driving the data, then you would expect interest rates to be higher exactly when people want to consume more. In that case, the Euler equation isn't wrong; it's just not being used properly. <br /><br />(Of course economists who want to keep clear of the Lucas critique have an incentive to assume constant preferences, because once you admit that preferences can change, you must start to worry that they can be influenced by policy, and probably technology can too, so the prospect for ever having robust structural models starts to diminish.)Andy Harlesshttps://www.blogger.com/profile/17582263872850949568noreply@blogger.com