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

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.