Life-cycle behaviour of US households. A nonlinear GMM estimation on pseudopanel data

Abstract

Since Auerbach and Kotlikoff's [(1987). Dynamic fiscal policy. Cambridge: Cambridge University Press] studies, the overlapping generations (OLG) model has become a useful modelling tool of policy evaluation. Given the lack of data on life-cycle behaviour, the parameterisation of such models is cumbersome. The purpose of this paper is to offer an econometrics-based method for estimating the utility function parameters. These parameters determine both the short-run responses to policy shocks and the speed of convergence toward the long-run solution. We use the US Consumer Expenditure Survey data and create a pseudopanel data bank with representative agents. Our estimators are obtained by compiling generalised method of moments (GMM) yearly values following the minimum distance estimation (MDE) of Chamberlain [(1984). Panel data. In Z. Griliches & M. D. Intriligator (Eds.), Handbook of econometrics II (pp. 1247-1318). Amsterdam: North-Holland]. It is shown that leisure is not an explicit argument of the utility function, the intertemporal elasticity of substitution is rather low, and aggregated purchases of goods present some durability. © 2001 Society for Policy Modeling. Published by Elsevier Science Inc.