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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: Serletis@ucalgary.ca. Phone: (403) 220-4092. Fax: (403) 282-5262
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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

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Footnotes

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

References

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