Hostname: page-component-cd9895bd7-gbm5v Total loading time: 0 Render date: 2024-12-26T21:36:26.209Z Has data issue: false hasContentIssue false
  • English
  • Français

CONSUMPTION, LEISURE, AND MONEY

Published online by Cambridge University Press:  10 September 2019

Apostolos Serletis  and
Libo Xu
Apostolos Serletis*
Affiliation:
University of Calgary
Libo Xu
Affiliation:
University of San Francisco
*
Address correspondence to: Apostolos Serletis, Department of Economics, University of Calgary, Calgary, Alberta T2N 1N4, Canada. e-mail: [email protected]. Phone: (403) 220-4092. Fax: (403) 282-5262
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper takes a parametric approach to demand analysis and tests the weak separability assumptions that are often implicitly made in representative agent models of modern macroeconomics. The approach allows estimation and testing in a systems-of-equations context, using the minflex Laurent flexible functional form for the underlying utility function and relaxing the assumption of fixed consumer preferences by assuming Markov regime switching. We generate inference consistent with both theoretical and econometric regularity. We strongly reject weak separability of consumption and leisure from real money balances as well as weak separability of consumption from leisure and real money balances, meaning that the inclusion of a money in economic models would be of quantitative importance. We also investigate the substitutability/complementarity relationship among different categories of personal consumption expenditure (nondurables, durables, and services), leisure, and money. We find that the goods are net Morishima substitutes, but because of positive income effects they are gross complements. The implications for monetary policy are also briefly discussed.

Keywords

Weak SeparabilityMinflex Laurent Functional FormMarkov Regime Switching
Type
Articles
Information
Macroeconomic Dynamics , Volume 25 , Issue 6 , September 2021 , pp. 1412 - 1441
Copyright
© Cambridge University Press 2019

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

We would like to thank an associate editor and two anonymous referees for comments that greatly improved the paper.

References

REFERENCES

Abbott, M. and Ashenfelter, O. (1976) Labor supply, commodity demand, and the allocation of time. Review of Economic Studies 43, 339–412.CrossRefGoogle Scholar
Aguiar, V. and Kashaev, N. (2018) Stochastic revealed preferences with measurement error: Testing for exponential discounting in survey data. Mimeo, University of Western Ontario.CrossRefGoogle Scholar
Barnett, W. A. (1979) The joint allocation of leisure and goods expenditure. Econometrica 47, 539–563.CrossRefGoogle Scholar
Barnett, W. A. (1983) New indices of money supply and the flexible Laurent demand system. Journal of Business and Economic Statistics 1, 7–23.Google Scholar
Barnett, W. A. (1985) The Minflex-Laurent translog flexible functional form. Journal of Econometrics 1, 33–44.CrossRefGoogle Scholar
Barnett, W. A. (2002) Tastes and technology: Curvature is not sufficient for regularity. Journal of Econometrics 108, 199–202.CrossRefGoogle Scholar
Barnett, W. A. (2016) Friedman and Divisia monetary measures. In: R. A. Cord and D. Hammond (eds.), Milton Friedman: Contributions to Economics and Public Policy, pp. 265–291. Oxford: Oxford University Press.CrossRefGoogle Scholar
Barnett, W. A. and Chauvet, M. (2011) How better monetary statistics could have signaled the financial crisis. Journal of Econometrics 161, 6–23.CrossRefGoogle Scholar
Barnett, W. A. and Choi, S. (1989) A Monte Carlo study of tests of blockwise weak separability. Journal of Business and Economic Statistics 83, 363–377.Google Scholar
Barnett, W. A. and de Peretti, P. (2009) Admissible clustering of aggregator components: A necessary and sufficient stochastic seminonparametric test for weak separability. Macroeconomic Dynamics 13, 317–334.CrossRefGoogle Scholar
Barnett, W. A. and Lee, Y. W. (1985) The global properties of the minflex Laurent, generalized Leontief, and translog flexible functional forms. Econometrica 53, 1421–1437.CrossRefGoogle Scholar
Barnett, W. A., Liu, J., Mattson, R. S. and van den Noort, J. (2013) The new CFS Divisia monetary aggregates: Design, construction, and data sources. Open Economies Review 24, 101–124.CrossRefGoogle Scholar
Barnett, W. A. and Serletis, A. (2008) Consumer preferences and demand systems. Journal of Econometrics 147, 210–224.CrossRefGoogle Scholar
Belongia, M. T. and Ireland, P. N. (2014) The Barnett critique after three decades: A new Keynesian analysis. Journal of Econometrics 183, 5–21.CrossRefGoogle Scholar
Belongia, M. T. and Ireland, P. N. (2015) Interest rates and money in the measurement of monetary policy. Journal of Business and Economic Statistics 33, 255–269.CrossRefGoogle Scholar
Berndt, E. R. and Savin, N. E. (1975) Estimation and hypothesis testing in singular equation systems with autoregressive disturbances. American Economic Review 43, 937–958.Google Scholar
Blackorby, C., Davidson, R. and Schworm, W. (1991) Implicit separability: Characterization and implications for consumer demands. Journal of Economic Theory 55, 364–99.CrossRefGoogle Scholar
Blackorby, C., Primont, D. and Russell, R. R. (1977) On testing separability restrictions with flexible functional forms. Journal of Econometrics 5, 195–209.CrossRefGoogle Scholar
Blackorby, C. and Russell, R. R. (1989) Will the real elasticity of substitution please stand up? American Economic Review 79, 882–888.Google Scholar
Brock, W. A. (1974) Money and growth: The case of long-run perfect foresight. International Economic Review 15, 750–77.CrossRefGoogle Scholar
Cherchye, L., Demuynck, T., De Rock, B. and Hjertstrand, P. (2015) Revealed preference tests for weak separability: An integer programming approach. Journal of Econometrics 186, 129–141.CrossRefGoogle Scholar
Cooley, T. F. and Hansen, G. D. (1989) The inflation tax in a real business cycle model. American Economic Review 79, 733–748.Google Scholar
Denny, M. and Fuss, M. (1977) The use of approximation analysis to test for separability and the existence of consistent aggregates. American Economic Review 67, 404–418.Google Scholar
Dery, C. and Serletis, A. (2019) Interest rates, money, and economic Activity. Mimeo, Department of Economics, University of Calgary.CrossRefGoogle Scholar
Diewert, W. E. (1974) Applications of duality theory. In: Intriligator, M. and Kendrick, D. (eds.), Frontiers in Quantitative Economics, vol. 2, pp. 106–171. Amsterdam: North-Holland.Google Scholar
Elger, T. and Jones, B. E. (2008) Can rejections of weak separability be attributed to random measurement error in the data? Economic Letters 99, 44–47.CrossRefGoogle Scholar
Filardo, A. J. (1994) Business-cycle phases and their transitional dynamics. Journal of Business and Economic Statistics 12, 299–308.Google Scholar
Fleissig, A. R., Hall, A. R. and Seater, J. J. (2000) GARP, separability, and the representative agent. Macroeconomic Dynamics 4, 324–342.CrossRefGoogle Scholar
Fleissig, A. R. and Rossana, R. J. (2003) Are consumption and government expenditures substitutes or complements? Morishima elasticity estimates from the Fourier flexible form. Economic Inquiry 41, 132–146.CrossRefGoogle Scholar
Fleissig, A. R. and Whitney, G. A. (2003) New PC-based test for Varian’s weak separability conditions. Journal of Business and Economic Statistics 21, 133–144.CrossRefGoogle Scholar
Fleissig, A. R. and Whitney, G. A. (2005) Testing the significance of violations of Afriat’s inequalities. Journal of Business and Economic Statistics 23, 355–362.CrossRefGoogle Scholar
Fleissig, A. R. and Whitney, G. A. (2008) A nonparametric test of weak separability and consumer preferences. Journal of Econometrics 147, 275–281.CrossRefGoogle Scholar
Gordon, S. and St-Amour, P. (2000) A preference regime model of bull and bear markets. American Economics Review 90, 1019–1033.CrossRefGoogle Scholar
Guiso, L., Sapienza, P. and Zingales, L. (2018) Time varying risk aversion. Journal of Financial Economics 128, 403–421.CrossRefGoogle Scholar
Hamilton, J. D. (1988) A neoclassical model of unemployment and the business cycle. Journal of Political Economics 96, 593–617.CrossRefGoogle Scholar
Hamilton, J. D. (1989) A new approach to the economic analysis of nonstationary time series and the business cycle. Econometrica 57, 357–384.CrossRefGoogle Scholar
Hendrickson, J. R. (2014) Redundancy or mismeasurement? A reappraisal of money. Macroeconomic Dynamics 18, 1437–1465.CrossRefGoogle Scholar
Hjertstrand, P., Swofford, J. L. and Whitney, G. A. (2016) Mixed integer programming revealed preference tests of utility maximization and weak separability of consumption, leisure and money. Journal of Money, Credit and Banking 48, 1547–1561.CrossRefGoogle Scholar
Hoffman, D. L. and Rasche, R. H. (1991) Long-run income and interest elasticities of money demand in the United States. Review of Economics and Statistics 73, 665–674.CrossRefGoogle Scholar
Jadidzadeh, A. and Serletis, A. (2019) The demand for liquid assets and optimal monetary aggregation. Journal of Money, Credit and Banking 51, 929–952.CrossRefGoogle Scholar
Jones, B. E. and De Peretti, P. (2005) A comparison of two methods for testing the utility maximization hypothesis when quantity data is measured with error. Macroeconomic Dynamics 9, 612–629.CrossRefGoogle Scholar
Jones, B. E. and Edgerton, D. L. (2009) Testing utility maximization with measurement errors in the data. Advances in Econometrics 24, 199–236.CrossRefGoogle Scholar
Jorgenson, D. W. and Lau, L. J. (1975) The structure of consumer preferences. Annals of Economic and Social Measurement 4, 49–101.Google Scholar
Kass, R. E. and Raftery, A. E. (1995) Bayes factors. Journal of the American Statistical Association 90, 773–795.CrossRefGoogle Scholar
Kim, C. J. (1994) Dynamic linear models with Markov switching. Journal of Econometrics 60, 1–22.CrossRefGoogle Scholar
Klaassen, F. (2002) Improving GARCH volatility forecasts with regime switching GARCH. Empirical Economics 27, 363–394.CrossRefGoogle Scholar
Laitinen, K. (1978) Why is demand homogeneity so often rejected? Economics Letters 1, 187–191.CrossRefGoogle Scholar
Lau, L. J. (1978) Testing and imposing monotonicity, convexity, and quasi-convexity constraints. In: Fuss, M. and McFadden, D. (eds.), Production Economics: A Dual Approach to Theory and Applications, vol. 1, pp. 409–453. Amsterdam: North Holland.Google Scholar
Leontief, W. W. (1947) An introduction to a theory of the internal structure of functional relationships. Econometrica 15, 361–373.CrossRefGoogle Scholar
Ljung, G. M. and Box, G. E. P. (1978) On a measure of lack of fit in time series models. Biometrica 65, 297–303.CrossRefGoogle Scholar
Lucas, R. E. Jr. and Stockey, N. L. (1987) Money and interest in a cash-in-advance economy. Econometrica 55, 491–513.CrossRefGoogle Scholar
McCallum, B. T. and Nelson, E. (2011) Money and inflation: Some critical issues. In: Friedman, B. M. and Woodford, M. (eds.), Handbook of Monetary Economics, vol. 3A, pp. 97–153. Amsterdam: Elsevier.Google Scholar
Meisner, J. (1979) The sad fate of the asymptotic Slutsky symmetry test for large systems. Economics Letters 2, 231–233.CrossRefGoogle Scholar
Moschini, G., Moro, D. and Green, R. D. (1994) Maintaining and testing separability in demand systems. American Journal of Agricultural Economics 76, 61–73.CrossRefGoogle Scholar
Musgrave, J. (1979) Durable goods owned by consumer in the United States, 1925–77. Survey of Current Business 59, 17–25.Google Scholar
Ni, S. (1995) An empirical analysis on the substitutability between private consumption and government purchases. Journal of Monetary Economics 36, 593–605.CrossRefGoogle Scholar
Ogaki, M. and Reinhart, C. M. (1998) Measuring intertemporal substitution: The role of durable goods. Journal of Political Economy 106, 1078–1098.CrossRefGoogle Scholar
Pakoš, M. (2011) Estimating intertemporal and intratemporal substitutions when both income and substitution effects are present: The role of durable goods. Journal of Business and Economic Statistics 29, 439–454.CrossRefGoogle Scholar
Pudney, S. E. (1980) Disaggregated demand analysis: The estimation of a class of non-linear demand systems. Review of Economic Studies 47, 875–892.CrossRefGoogle Scholar
Serletis, A. and Gogas, P. (2014) Divisia monetary aggregates, the great ratios, and classical money demand functions. Journal of Money, Credit and Banking 46, 229–241.CrossRefGoogle Scholar
Sidrauski, M. (1967) Rational choice and patterns of growth in a monetary economy. American Economic Review 57, 534–44.Google Scholar
Sims, C. A. and Zha, T. (2006) Were there regime switches in U.S. monetary policy? American Economic Review 96, 54–81.CrossRefGoogle Scholar
Sono, M. (1961) The effect of price changes on the demand and supply of separable goods. International Economic Review 2, 239–271.CrossRefGoogle Scholar
Stockman, A. C. (1981) Anticipated inflation and the capital stock in a cash-in-advance economy. Journal of Monetary Economics 8, 387–393.CrossRefGoogle Scholar
Svensson, L. E. O. (1985) Money and asset prices in a cash-in-advance economy. Journal of Political Economy 93, 919–944.Google Scholar
Swofford, J. L. and Whitney, G. A. (1987) Nonparametric tests of utility maximization and weak separability for consumption, leisure and money. Review of Economics and Statistics 69, 458–464.CrossRefGoogle Scholar
Swofford, J. L. and Whitney, G. A. (1988) A comparison of nonparametric tests of weak separability for annual and quarterly data on consumption, leisure, and money. Journal of Business and Economic Statistics 6, 241–246.Google Scholar
Swofford, J. L. and Whitney, G. A. (1994) A revealed preference test for weakly separable utility maximization with incomplete adjustment. Journal of Econometrics 60, 235–249.CrossRefGoogle Scholar
Taylor, J. B. (1993) Discretion versus policy rules in practice. Carnegie-Rochester Conference Series on Public Policy 39, 195–214.CrossRefGoogle Scholar
Varian, H. R. (1982) The nonparametric approach to demand analysis. Econometrica 50, 845–973.CrossRefGoogle Scholar
Xu, L. and Serletis, A. (2019) The demand for assets: Evidence from the Markov switching normalized quadratic model. Mimeo, Department of Economics, University of Calgary.Google Scholar