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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.

Suggested Citation

  • Martin S. Eichenbaum & Lars Peter Hansen & Kenneth J. Singleton, 1986. "A Time Series Analysis of Representative Agent Models of Consumption andLeisure Choice Under Uncertainty," NBER Working Papers 1981, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:1981
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    References listed on IDEAS

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