Working Paper: NBER ID: w0898
Authors: N. Gregory Mankiw; Julio J. Rotemberg; Lawrence H. Summers
Abstract: Modern neoclassical theories of the business cycle posit that aggregate fluctuations in consumption and employment are the consequence of dynamic optimizing behavior by economic agents who face no quantity constraint. In this paper, we estimate an explicit model :f this type. In particular, we assume that the observed fluctuations correspond to the decisions of an optimizing representative individual. This individual has a stable utility function which is additively separable over time but not necessarily additively separable in consumption and leisure. We estimate three first order conditions which represent three margins on which the individual is optimizing. He can trade off present consumption for future consumption, present leisure for future leisure and present consumption for present leisure. Our results show that the aggregate U.S. data are extremely reluctant to be characterized by a model of this type. Not only are the overidentifying restrictions statistically rejected but, in addition, the estimated utility function is often not concave. Even when it is concave the estimates imply that either consumption or leisure is an inferior good.
Keywords: Intertemporal substitution; Business cycles; Consumption; Labor supply
JEL Codes: E21; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| fluctuations in consumption (E21) | optimizing decisions (D91) |
| fluctuations in labor supply (J20) | optimizing decisions (D91) |
| optimizing decisions (D91) | utility function (D11) |
| present consumption for future consumption (D15) | utility maximization (D11) |
| present leisure for future leisure (D15) | utility maximization (D11) |
| present consumption for present leisure (D15) | utility maximization (D11) |
| estimated utility function fails to be concave (D11) | not maximizing utility (D11) |
| not maximizing utility (D11) | consumption or leisure as inferior good (D11) |
| estimated parameters implausible (C51) | challenge neoclassical interpretation (B13) |
| model's restrictions rejected (C52) | challenge neoclassical interpretation (B13) |