Identification Robust Empirical Evidence on the Open Economy IS-Curve
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(Published version)
Date
2022
Authors
Haque, Q.
Magnusson, L.M.
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Oxford Bulletin of Economics and Statistics, 2022; 85(2):345-372
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Qazi Haque, Leandro M. Magnusson
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Abstract
Existing empirical evidence on the Euler equation based on closed economy models suggests low responsiveness of aggregate consumption to changes in interest rates. We incorporate open economy features and consider extensions that include habit formation and hand-to-mouth consumers. For several open economies and applying econometric methods that are robust to weak instruments and structural changes, we continue to find low values for the elasticity of intertemporal substitution, implying a small effect of real interest rate changes on aggregate income. In some countries, structural changes are informative for identification, but otherwise aggregate data provide limited information to learn about IS-curve specifications.
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Published April 2023
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© 2022 The Authors. Oxford Bulletin of Economics and Statistics published by Oxford University and John Wiley & Sons Ltd. This is an open access article under the terms of the Creative Commons Attribution-NonCommercial-NoDerivs License, which permits use and distribution in any medium, provided the original work is properly cited, the use is non-commercial and no modifications or adaptations are made.