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

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