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Research Institute of Industrial Economics (IFN) Working Paper Series

No 971:
Revealed Preference Tests of Utility Maximization and Weak Separability of Consumption, Leisure and Money with Incomplete Adjustment

Per Hjertstrand (), James L. Swofford and Gerald A. Whitney

Abstract: Swofford and Whitney (1987) investigated the validity of two types of assumptions that underlie the representative agent models of modern macroeconomics and monetary economics. These assumptions are utility maximization and weak or functional separability that is required for an economic aggregate to exist. To reinvestigate the structure of the representative consumer’s preferences we develop a mixed integer programming revealed preference test with incomplete adjustment. We find that both a narrow official US monetary aggregate, M1, and a broad collection of assets are weakly separable. We further find that a modern analog of money as suggested by Friedman and Schwartz (1963) is also weakly separable. We also find that consumption goods and leisure are separable from all monetary goods. We find no evidence that official US M2 or MZERO are consistent with utility maximization and weak separability. That is, the assets in these measures do not meet the requirement for forming an aggregate over goods that is consistent with economic theory. Finally, we find that three broad categories of consumption goods, durables, nondurables and services, do not meet the weak separability conditions required for forming a consumption aggregate. However, a consumption aggregate of nondurables and services is weakly separable.

Keywords: Monetary aggregation; Weak separability; Revealed preference; (follow links to similar papers)

JEL-Codes: C60; E51; G20; (follow links to similar papers)

22 pages, September 2, 2013

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