Question

what condition must hold in the euler equation from above to reproduce the trend of consumption growth since early 1990's? what is missing in the euler equation? g) (5 marks) how can we capture the significant fall in consumption during 2020 (covid)?

Answer 1

The condition that must hold in the Euler equation to reproduce the trend of consumption growth since the early 1990s is that the growth rate of consumption must be equal to the sum of the growth rate of income and the growth rate of the discount factor. However, the Euler equation is missing a specific factor that can capture the significant fall in consumption during 2020 due to COVID-19.

Step-by-step explanation:

The condition that must hold in the Euler equation to reproduce the trend of consumption growth since the early 1990s is that the growth rate of consumption must be equal to the sum of the growth rate of income and the growth rate of the discount factor. The Euler equation is an equation that represents the intertemporal optimization problem of an individual's consumption and savings decisions.

However, the Euler equation is missing a specific factor that can capture the significant fall in consumption during 2020 due to COVID-19. This missing factor could be a shock or change in the discount factor that affects individual decision-making.