Consumption, Leisure, and Money

Macroeconomic Dynamics (Forthcoming)

41 Pages Posted: 22 Jul 2019

See all articles by Apostolos Serletis

Apostolos Serletis

University of Calgary - Department of Economics

Libo Xu

University of San Francisco - Department of Economics

Date Written: July 6, 2019


This paper takes a parametric approach to demand analysis and tests the weak separability assumptions that are often implicitly made in representative agent models of modern macroeconomics. The approach allows estimation and testing in a systems-of-equations con- text, using theMinflex Laurent flexible functional form for the underlying utility function and relaxing the assumption of fixed consumer preferences by assuming Markov regime switch- ing. We generate inference consistent with both theoretical and econometric regularity. We strongly reject weak separability of consumption and leisure from real money balances as well as weak separability of consumption from leisure and real money balances, meaning that the inclusion of a money in economic models would be of quantitative importance. We also investigate the substitutability/complementarity relationship among different categories of personal consumption expenditure (nondurables, durables, and services), leisure, and money. We find that the goods are net Morishima substitutes, but because of positive income effects they are gross complements. The implications for monetary policy are also briefy discussed.

Keywords: Weak separability; Minflex Laurent functional form; Markov regime switching

JEL Classification: E41, E42, E51, C32, C51

Suggested Citation

Serletis, Apostolos and Xu, Libo, Consumption, Leisure, and Money (July 6, 2019). Macroeconomic Dynamics (Forthcoming), Available at SSRN:

Apostolos Serletis (Contact Author)

University of Calgary - Department of Economics ( email )

2500 University Drive, NW
Calgary, Alberta T2N 1N4
403 220-4091 (Phone)
403 282-5262 (Fax)

Libo Xu

University of San Francisco - Department of Economics ( email )

2130 Fulton Street
San Francisco, CA 94117-1080
United States

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