In all but the most trivial settings Euler equation estimation in saddlepath stable systems is faced with a fundamental identification problem: The Euler equation allows for an unstable root (of its characteristic equation), while the data used to estimate the Euler equation also obey the...

This paper challenges the view that the observed negative correlation between the Federal Funds rate and the interest rate implied by consumption Euler equations is systematically linked to monetary policy. By using a Monte Carlo experiment, we show that stochastic risk premium disturbances have...