Revealed Preference Tests of Utility Maximization and Weak Separability of Consumption, Leisure and Money with Incomplete Adjustment

23 Pages Posted: 15 Jul 2014

See all articles by Per Hjertstrand

Per Hjertstrand

Research Institute of Industrial Economics (IFN)

James L. Swofford

University of South Alabama

Gerald Whitney

University of New Orleans

Date Written: September 2, 2013

Abstract

Swofford and Whitney (1987) investigated the validity of two types of assumptions that underlie the representative agent models of modern macroeconomics and monetary economics. These assumptions are utility maximization and weak or functional separability that is required for an economic aggregate to exist.

To reinvestigate the structure of the representative consumer’s preferences we develop a mixed integer programming revealed preference test with incomplete adjustment. We find that both a narrow official US monetary aggregate, M1, and a broad collection of assets are weakly separable. We further find that a modern analog of money as suggested by Friedman and Schwartz (1963) is also weakly separable. We also find that consumption goods and leisure are separable from all monetary goods. We find no evidence that official US M2 or MZERO are consistent with utility maximization and weak separability. That is, the assets in these measures do not meet the requirement for forming an aggregate over goods that is consistent with economic theory.

Finally, we find that three broad categories of consumption goods, durables, nondurables and services, do not meet the weak separability conditions required for forming a consumption aggregate. However, a consumption aggregate of nondurables and services is weakly separable.

Keywords: Monetary aggregation, Weak separability, Revealed preference

JEL Classification: E51, G20, C60

Suggested Citation

Hjertstrand, Per and Swofford, James L. and Whitney, Gerald, Revealed Preference Tests of Utility Maximization and Weak Separability of Consumption, Leisure and Money with Incomplete Adjustment (September 2, 2013). IFN Working Paper No. 971, Available at SSRN: https://ssrn.com/abstract=2466332 or http://dx.doi.org/10.2139/ssrn.2466332

Per Hjertstrand (Contact Author)

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

James L. Swofford

University of South Alabama ( email )

307 University Blvd
Mobile, AL 36688
United States

Gerald Whitney

University of New Orleans ( email )

2000 Lakeshore Drive
New Orleans, LA 70148
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
37
Abstract Views
503
PlumX Metrics