CONSUMPTION GROWTH, THE INTEREST-RATE AND AGGREGATION

In this paper we present empirical evidence on aggregation problems wi th Euler equations for consumption. Our main results are: estimates of the elasticity of intertemporal substitution for consumption are cons istently lower for aggregate data than for average cohort data and the theoretical model is statistically rejected on aggregate data, not re jected on average cohort data. In trying to explain these differences we find that a major role is played by the non-linearity of the estima ble equation and by omitted demographic factors (normally unobservable on aggregate data). However, even when these sources of aggregation b ias are corrected for, the estimates of the elasticity of intertempora l substitution obtained from aggregate data remain lower than those ob tained from average cohort data, and excess sensitivity tests reject t he implications of the model. This can be explained as the result of i mposing identical coefficients to cohorts who differ in preferences an d/or opportunity sets.