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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.

Suggested Citation

  • Browning, Martin, 1989. "A Nonparametric Test of the Life-Cycle Rational Expectations Hypothesis," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(4), pages 979-992, November.
  • Handle: RePEc:ier:iecrev:v:30:y:1989:i:4:p:979-92
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    Cited by:

    1. Abi Adams & Laurens Cherchye & Bram De Rock & Ewout Verriest, 2014. "Consume Now or Later? Time Inconsistency, Collective Choice, and Revealed Preference," American Economic Review, American Economic Association, vol. 104(12), pages 4147-4183, December.
    2. Ian Crawford & Bram De Rock, 2014. "Empirical Revealed Preference," Annual Review of Economics, Annual Reviews, vol. 6(1), pages 503-524, August.
    3. Crawford, Ian & Polisson, Matthew, 2014. "Testing for intertemporal nonseparability," Journal of Mathematical Economics, Elsevier, vol. 52(C), pages 46-49.
    4. Thomas Demuynck, 2015. "Statistical inference for measures of predictive success," Theory and Decision, Springer, vol. 79(4), pages 689-699, December.
    5. Martin Browning & Ian Crawford & Laura Blow, 2017. "Nonparametric Analysis of Time-Inconsistent Preferences," Economics Series Working Papers 835, University of Oxford, Department of Economics.
    6. Paul van Bruggen, 2016. "A Comment on Revealed Preference with a Subset of Goods," Tinbergen Institute Discussion Papers 16-068/I, Tinbergen Institute.
    7. Laurens CHERCHYE & Bram DE ROCK & Jeroen SABBE & Ewout VERRIEST, 2010. "Commitment in intertemporal household consumption: a revealed preference analysis," Working Papers Department of Economics ces10.33, KU Leuven, Faculty of Economics and Business, Department of Economics.
    8. Hiroki Nishimura & Efe A. Ok & John K.-H. Quah, 2017. "A Comprehensive Approach to Revealed Preference Theory," American Economic Review, American Economic Association, vol. 107(4), pages 1239-1263, April.
    9. Laurens Cherchye & Ian Crawford & Bram Rock & Frederic Vermeulen, 2016. "Gorman revisited: nonparametric conditions for exact linear aggregation," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 7(2), pages 203-220, June.
    10. 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, May.
    11. Ian Crawford & Matthew Polisson, 2015. "Demand analysis with partially observed prices," IFS Working Papers W15/16, Institute for Fiscal Studies.
    12. Ian Crawford, 2007. "A nonparametric analysis of habits models," CeMMAP working papers CWP30/07, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
    13. Laura Blow & Martin Browning & Ian Crawford, 2014. "Never mind the hyperbolics: nonparametric analysis of time-inconsistent preferences," IFS Working Papers W14/17, Institute for Fiscal Studies.
    14. Laurens CHERCHYE & Thomas DEMUYNCK & Bram DE ROCK, 2010. "Noncooperative household consumption with caring," Working Papers Department of Economics ces10.34, KU Leuven, Faculty of Economics and Business, Department of Economics.
    15. Abi Adams & Richard Blundell & Martin Browning & Ian Crawford, 2015. "Prices versus preferences: taste change and revealed preference," IFS Working Papers W15/11, Institute for Fiscal Studies.
    16. 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.

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