A TIME-SERIES ANALYSIS OF REAL WAGES, CONSUMPTION, AND ASSET RETURNS

This paper re-examines whether the time series properties of aggregate consumption, real wages, and asset returns can be explained by a neoc lassical model, Previous empirical rejections of the model have sugges ted that the optimal labour contract model might be appropriate for un derstanding the time series properties of the real wage rate and consu mption, We show that an optimal contract model restricts the long-run relation of the real wage rate and consumption. We exploit this long-r un restriction (cointegration restriction) for estimating and testing the model, using Ogaki and Park's (1989) cointegration approach. This long-run restriction involves a parameter that we call the long-run in tertemporal elasticity of substitution (IES) for non-durable consumpti on but does not involve the IES for leisure. This allows us to estimat e the long-run IES for non-durable consumption from a cointegrating re gression, Tests for the null of cointegration do not reject our model, As a further analysis, our estimates of the long-run IES for non-dura ble consumption are used to estimate the discount factor and a coeffic ient of time-nonseparability using Hansen's (1982) Generalized Method of Moments. We form a specification test for our model a la Hausman (1 978) from these two steps. This specification test does not reject our model.