A Time Series Analysis of Real Wages, Consumption, and Asset Returns
Posted: 24 Apr 1998
Date Written: Undated
This paper reexamines whether or not the time series properties of aggregate consumption, real wages, and asset returns can be explained by a neoclassical model. Previous empirical rejections of the model have suggested that the optimal labor contract model might be appropriate for understanding the time series properties of the real wage rate and consumption. We show that an optimal contract model restricts the long-run restriction (cointegration restriction) for estimating and testing the model, using Ogaki and Park s (1989) cointegration approach. this long- run restriction involves a parameter that we call the long- run intertemporal elasticity of substitution (IES) for nondurable consumption but does not involve the IES for leisure. This allows us to estimate the long-run IES for nondurable consumption from a cointegrating regression. Tests for the null of cointegration do not reject our model. As a further analysis, our estimates of the long-run IES for nondurable consumption are used to estimate the discount factor and a coefficient of time-nonseparability using Hansen s (1982) Generalized Method of Moments. We form a specification test for our model a la Hausman (1978) from these two steps. This specification test does not reject our model.
JEL Classification: C32
Suggested Citation: Suggested Citation