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

Martin S. Eichenbaum, Lars Peter Hansen, Kenneth J. Singleton

NBER Working Paper No. 1981
Issued in July 1986
NBER Program(s):   EFG

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.

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Document Object Identifier (DOI): 10.3386/w1981

Published: Quarterly Journal of Economics, February 1988.

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