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

43 Pages Posted: 9 Mar 2004 Last revised: 2 Dec 2022

See all articles by Martin Eichenbaum

Martin Eichenbaum

Northwestern University; National Bureau of Economic Research (NBER)

Lars Peter Hansen

University of Chicago - Department of Economics; National Bureau of Economic Research (NBER)

Kenneth J. Singleton

Stanford University - Graduate School of Business

Date Written: July 1986

Abstract

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

Suggested Citation

Eichenbaum, Martin and Hansen, Lars Peter and Singleton, Kenneth J., A Time Series Analysis of Representative Agent Models of Consumption Andleisure Choice Under Uncertainty (July 1986). NBER Working Paper No. w1981, Available at SSRN: https://ssrn.com/abstract=344788

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