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Euler Equation in Household Investigation

Student: Tatyana Shindina

Supervisor: Alexander V. Larin

Faculty: Faculty of Economics

Educational Programme: Economics (Bachelor)

Final Grade: 9

Year of Graduation: 2016

This paper investigates the household consumption behavior in Russia in terms of their rationality. The theoretical part of the paper includes the review of the scientific literature about the analysis and estimating of the Euler equations. The methods of estimating are also considered. Then, in this paper we construct a theoretical model, which assume that consumer spending of households can be determined by Euler's equation. In the practical part of the study the built model is assessed. The estimation is based on micro-level panel data presented by Russian Federal State Statistics Service [RFSSS] and by the Central Bank of the Russian Federation from 2005 to 2014. The model is estimated using the method of instrumental variables. The results of the estimating the Euler equation confirm the existence of a correlation between the household consumption and interest rate. Also this paper presents estimates of elasticity of intertemporal substitution. It describes how consumption of households will change if the interest rate changes by one percentage point. The results obtained in this study indicate that households in the Russian Federation planning their consumer spending take into account changes in interest rates. Therefore they behave rationally.

Full text (added May 26, 2016)

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