Intertemporal substitution, exogeneity, and surprises: estimating life cycle models for Canada

We estimate consumption and labour supply models for Canada using US variables as instruments instead of lagged Canadian variables. Our results suggest that the endogeneity of lagged variables has not been a serious problem in previous studies. We also develop estimation methods for use when the agents' information sets are unknown and the model contains the realization and the innovation of an endogenous variable. We use the approach to estimate a labour supply model combining intertemporal substitution and job search and to estimate the labour supply and consumption responses to marginal utility of income changes induced by wage, price, and interest rate surprises. -Authors