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A Time Series Analysis of Representative Agent Models of Consumption andLeisure Choice Under Uncertainty

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  • Martin S. Eichenbaum
  • Lars Peter Hansen
  • Kenneth J. Singleton

Abstract

This paper investigates empirically a model of aggregate consumption and leisure decisions in which goods and leisure provide services over time. The implied time non-separability of preferences introduces an endogenous source of dynamics which affects both the co-movements in aggregate compensation and hours worked and the cross-relations between prices and quantities. These cross-relations are examined empirically using post-war monthly U.S. data on quantities, real wages and the real return on the one-month Treasury bill. We find substantial evidence against the overidentifying restrictions. The test results suggest that the orthogonality conditions associated with the representative consumer's intratemporal Euler equation underlie the failure of the model. Additionally, the estimated values of key parameters differ significantly from the values assumed in several studies of real business models. Several possible reasons for these discrepancies are discussed.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1981.

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Date of creation: Jul 1986
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Publication status: published as Quarterly Journal of Economics, February 1988.
Handle: RePEc:nbr:nberwo:1981

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  1. Altonji, Joseph G, 1982. "The Intertemporal Substitution Model of Labour Market Fluctuations: An Empirical Analysis," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 49(5), pages 783-824, Special I.
  2. Ashenfelter, Orley C & Card, David, 1982. "Time Series Representations of Economic Variables and Alternative Models of the Labour Market," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 49(5), pages 761-81, Special I.
  3. Martin S. Eichenbaum & Lars Peter Hansen, 1987. "Estimating Models with Intertemporal Substitution Using Aggregate Time Series Data," NBER Working Papers 2181, National Bureau of Economic Research, Inc.
  4. Rubinstein, Mark, 1974. "An aggregation theorem for securities markets," Journal of Financial Economics, Elsevier, Elsevier, vol. 1(3), pages 225-244, September.
  5. Mankiw, N Gregory & Rotemberg, Julio J & Summers, Lawrence H, 1985. "Intertemporal Substitution in Macroeconomics," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 100(1), pages 225-51, February.
  6. Brennan, M. J. & Kraus, Alan, 1978. "Necessary Conditions for Aggregation in Securities Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 13(03), pages 407-418, September.
  7. Lars Peter Hansen & Robert J. Hodrick, 1983. "Risk Averse Speculation in the Forward Foreign Exchange Market: An Econometric Analysis of Linear Models," NBER Chapters, National Bureau of Economic Research, Inc, in: Exchange Rates and International Macroeconomics, pages 113-152 National Bureau of Economic Research, Inc.
  8. Hansen, Lars Peter & Singleton, Kenneth J, 1982. "Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations Models," Econometrica, Econometric Society, Econometric Society, vol. 50(5), pages 1269-86, September.
  9. Robert E. Hall, 1979. "Labor Supply and Aggregate Fluctuations," NBER Working Papers 0385, National Bureau of Economic Research, Inc.
  10. Brown, Bryan W & Maital, Shlomo, 1981. "What Do Economists Know? An Empirical Study of Experts' Expectations," Econometrica, Econometric Society, Econometric Society, vol. 49(2), pages 491-504, March.
  11. Pollak, Robert A, 1970. "Habit Formation and Dynamic Demand Functions," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 78(4), pages 745-63, Part I Ju.
  12. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, Econometric Society, vol. 50(6), pages 1345-70, November.
  13. Gallant, A. Ronald & Jorgenson, Dale W., 1979. "Statistical inference for a system of simultaneous, non-linear, implicit equations in the context of instrumental variable estimation," Journal of Econometrics, Elsevier, Elsevier, vol. 11(2-3), pages 275-302.
  14. Lucas, Robert E, Jr & Rapping, Leonard A, 1969. "Real Wages, Employment, and Inflation," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 77(5), pages 721-54, Sept./Oct.
  15. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, Econometric Society, vol. 50(4), pages 1029-54, July.
  16. Hansen, Lars Peter & Hodrick, Robert J, 1980. "Forward Exchange Rates as Optimal Predictors of Future Spot Rates: An Econometric Analysis," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 88(5), pages 829-53, October.
  17. Muellbauer, John N J, 1981. "Linear Aggregation in Neoclassical Labour Supply," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 48(1), pages 21-36, January.
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