Empirical evidence on the Euler equation for investment in the US

TL;DR

This paper empirically tests the consistency of the Euler equation for investment in US macro data, finding it generally consistent but with limited information about key parameters due to data unresponsiveness.

Contribution

It provides robust econometric evidence supporting the Euler equation's validity in aggregate data and highlights identification challenges for certain parameters.

Findings

Euler equation is consistent with aggregate macro data

Limited information on parameters due to investment's unresponsiveness

Identification of model parameters relies on structural restrictions

Abstract

Is the typical specification of the Euler equation for investment employed in DSGE models consistent with aggregate macro data? Using state-of-the-art econometric methods that are robust to weak instruments and exploit information in possible structural changes, the answer is yes. Unfortunately, however, there is very little information about the values of these parameters in aggregate data because investment is unresponsive to changes in capital utilization and the real interest rate. In DSGE models, the investment adjustment cost and the persistence of the investment-specific technology shock parameters are mainly identified by, respectively, the cross-equation restrictions and the dynamics implied by the structure of the model.