Skip to main content
eScholarship
Open Access Publications from the University of California

UC San Diego

UC San Diego Previously Published Works bannerUC San Diego

The double power law in consumption and implications for testing Euler equations

  • Author(s): Toda, AA;
  • Walsh, K
  • et al.

Published Web Location

https://doi.org/10.1086/682729
Abstract

We provide evidence suggesting that the cross-sectional distributions of US consumption and its growth rate obey the power law in both the upper and lower tails, with exponents approximately equal to four. Consequently, high-order moments are unlikely to exist, and the generalized method of moments estimation of Euler equations that employs cross-sectional moments may be inconsistent. Through bootstrap studies, we find that the power law appears to generate spurious nonrejection of heterogeneous-agent asset pricing models in explaining the equity premium. Dividing households into age groups, we propose an estimation approach that appears less susceptible to fat tail issues.

Many UC-authored scholarly publications are freely available on this site because of the UC's open access policies. Let us know how this access is important for you.

Main Content
For improved accessibility of PDF content, download the file to your device.
Current View