Working Paper: NBER ID: w1981
Authors: Martin S. Eichenbaum; Lars Peter Hansen; Kenneth J. Singleton
Abstract: This paper investigates empirically a model of aggregate consumption and \nleisure decisions in which goods and leisure provide services over time. The \nimplied time non-separability of preferences introduces an endogenous source of \ndynamics which affects both the co-movements in aggregate compensation and hours \nworked and the cross-relations between prices and quantities. These cross-relations \nare examined empirically using post-war monthly U.S. data on quantities, \nreal wages and the real return on the one-month Treasury bill. We find \nsubstantial evidence against the overidentifying restrictions. The test results \nsuggest that the orthogonality conditions associated with the representative \nconsumer's intratemporal Euler equation underlie the failure of the model. \nAdditionally, the estimated values of key parameters differ significantly from \nthe values assumed in several studies of real business models. Several possible \nreasons for these discrepancies are discussed.
Keywords: Consumption; Leisure; Uncertainty; Time Series Analysis
JEL Codes: E21; E24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| consumption (E21) | hours worked (J22) |
| consumption (E21) | compensation (M52) |
| nontimeseparability of preferences (D11) | comovements in aggregate compensation and hours worked (J39) |
| model's failure to meet overidentifying restrictions (C30) | assumed relationships between consumption and labor supply (J29) |
| model (C59) | understanding aggregate labor supply dynamics (J20) |