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A Nonparametric Test of the Life-Cycle Rational Expectations Hypothesis

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  • Browning, Martin

Abstract

In a world of perfect certainty and perfect capital markets agents allocate expenditure in such a way that the marginal utility of discounted expenditure is the same in each period. In this paper we present a test of whether any particular series of discounted prices and quantities can be exactly reconciled with a utility function and marginal utility of discounted expenditure that do not change from period to period. We find that U.K., U.S. and Canadian postwar aggregate data all reject our condition, although it is not rejected for long sub-periods. We show that our results for the U.K. suggest particular modifications to the strong form of the rational expectations hypothesis that our conditions test. In fact these data are exactly consistent with a number of alternative hypotheses. From this we argue that time series data are ill suited to parametric testing of any of the competing hypotheses on the inter-temporal allocation of expenditure. Copyright 1989 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

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Bibliographic Info

Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

Volume (Year): 30 (1989)
Issue (Month): 4 (November)
Pages: 979-92

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Handle: RePEc:ier:iecrev:v:30:y:1989:i:4:p:979-92

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Cited by:
  1. Laurens CHERCHYE & Bram DE ROCK & Jeroen SABBE & Ewout VERRIEST, 2010. "Commitment in intertemporal household consumption: a revealed preference analysis," Center for Economic Studies - Discussion papers ces10.33, Katholieke Universiteit Leuven, Centrum voor Economische Studiën.
  2. Crawford, Ian & Polisson, Matthew, 2014. "Testing for intertemporal nonseparability," Journal of Mathematical Economics, Elsevier, vol. 52(C), pages 46-49.
  3. Ian Crawford, 2007. "A nonparametric analysis of habits models," CeMMAP working papers CWP30/07, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
  4. Thomas Demuynck & Ewout Verriest, 2013. "I’Ll Never Forget My First Cigarette: A Revealed Preference Analysis Of The “Habits As Durables” Model," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 54(2), pages 717-738, 05.
  5. Orazio P. Attanasio & Martin Browning, 1994. "Testing the life cycle model consumption: what can we learn from micro and macro data?," Investigaciones Economicas, Fundación SEPI, vol. 18(3), pages 433-463, September.
  6. Abi Adams & Laurens Cherchye & Bram De Rock & Ewout Verriest, 2014. "Consume now or later? Time inconsistency, collective choice and revealed preference," IFS Working Papers W14/08, Institute for Fiscal Studies.

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