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A Comparison Of Two Methods For Testing The Utility Maximization Hypothesis When Quantity Data Are Measured With Error

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  • JONES, BARRY E.
  • DE PERETTI, PHILIPPE

Abstract

The Generalized Axiom of Revealed Preference (GARP) can be violated because of random measurement errors in the observed quantity data. We study two tests proposed by Varian (1985) and de Peretti (2004), which test GARP within an explicit stochastic framework. Both tests compute adjusted quantity data that are compliant with GARP. We compare and contrast the two tests in theoretical terms and in an empirical application. The empirical application is based on testing a large group of monetary assets for the United States over multiple sample periods spanning 1960 1992. We found that both tests provided reasonable results and were largely consistent with each other.

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Bibliographic Info

Article provided by Cambridge University Press in its journal Macroeconomic Dynamics.

Volume (Year): 9 (2005)
Issue (Month): 05 (November)
Pages: 612-629

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Handle: RePEc:cup:macdyn:v:9:y:2005:i:05:p:612-629_04

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Cited by:
  1. Luiz Maia Filho, 2008. "On the existence of well-behaved macro utility functions: reassessing the power of Varian's revealed preference test in consumption aggregates," Anais do XXXVI Encontro Nacional de Economia [Proceedings of the 36th Brazilian Economics Meeting] 200806301053170, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
  2. Binner, Jane M. & Bissoondeeal, Rakesh K. & Elger, C. Thomas & Jones, Barry E. & Mullineux, Andrew W., 2009. "Admissible monetary aggregates for the euro area," Journal of International Money and Finance, Elsevier, vol. 28(1), pages 99-114, February.
  3. Barnett, William A. & Serletis, Apostolos, 2008. "Consumer preferences and demand systems," MPRA Paper 8413, University Library of Munich, Germany.
  4. Elger, Thomas & Jones, Barry E., 2008. "Can rejections of weak separability be attributed to random measurement errors in the data?," Economics Letters, Elsevier, vol. 99(1), pages 44-47, April.
  5. Bergh , Andreas & Nilsson, Therese, 2008. "Do economic liberalization and globalization increase income inequality?," Working Papers 2008:12, Lund University, Department of Economics.
  6. Barry E. Jones & Livio Stracca, 2006. "Are money and consumption additively separable in the euro area? A non-parametric approach," Working Paper Series 704, European Central Bank.

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