Consumption Growth, the Interest Rate and Aggregation.

In this paper, the authors present empirical evidence on aggregation problems with Euler equations for consumption. Their main results are that the estimates of the elasticity of intertemporal substitution for consumption are consistently lower for aggregate data than for average cohort data and the theoretical model is statistically rejected on aggregate data, not rejected on average cohort data. In trying to explain these differences, the authors find that a major role is played by the nonlinearity of the estimable equation and by omitted demographic factors (normally unobservable on aggregate data). Copyright 1993 by The Review of Economic Studies Limited.