James L. Swofford

Nonparametric Tests of Utility Maximization and Weak Separability for Consumption, Leisure and Money

Some of the most fundamental assumptions of economics are utility maximization and weak separability of the arguments in the represen tative consumers utility function. This paper contains results from nonparametric tests of these assumptions about consumer behavior. The authors find that quarterly per capita data on consumption goods, le isure, and monetary assets are consistent with utility maximization. Further, consumption goods and leisure meet necessary and sufficient conditions for weak separability. Additionally, one grouping of relat ively liquid monetary assets meets the necessary conditions for weak separability. They also test and find no evidence of homothetic prefe rences. Copyright 1987 by MIT Press.

A revealed preference test for weakly separable utility maximization with incomplete adjustment

Abstract Functional structure is an important issue in many areas of economics. We suggest a nonparametric revealed preference test for weakly separable utility maximization that permits category incomplete adjustment within the period under study. This test is an extension of the necessary and sufficient condition for weakly separable utility maximization developed by Varian (1983). We implement this test and identify a quarterly economic monetary aggregate. This is the first implementation that we know about of any revealed preference necessary and sufficient condition for weakly separable utility maximization. We also perform sensitivity analyses of the test and find it to be reasonably robust.

A Comparison of Nonparametric Tests of Weak Separability for Annual and Quarterly Data on Consumption, Leisure, and Money

Among the most fundamental assumptions made in economics are utility maximization and the separability of the arguments in the representative consumers utility function. These assumptions are important for theoretical and empirical applications of economics. In this article, we present results from nonparametric tests of these assumptions of consumer behavior. We find that utility maximization generally obtains with either annual or quarterly per capita data on consumption goods, leisure, and relatively liquid monetary assets. Annual data on consumption goods, leisure, and all monetary assets are consistent with utility maximization. There is some evidence in support of using partial adjustment models when estimating quarterly data models of the demand for monetary assets. Further, annual data on consumption goods and leisure and on liquid monetary assets meet the necessary and sufficient conditions for weak separability. These results support the notion of a monetary aggregate more broadly based than cu...

A dynamic asymptotically ideal model of money demand

Abstract We estimate a dynamic asymptotically ideal model of a system of money demand equations. This specification allows incomplete portfolio adjustment. We base our policy conclusions on Morishima elasticities, because as Blackorby and Russell (1989) show, the Allen-Uzawa elasticities can give misleading results. We find that cash assets, savings deposits, and small time deposits are all substitutes for each other. These results imply that monetary authorities should target a relatively broad monetary aggregate that includes these assets, if policy is to have predictable effects on the economy.

Dynamic Asymptotically Ideal Models and Finite Approximation

We extend Barnett and Jonass asymptotically ideal model (AIM) to model for the possibility that the data were generated by a dynamic process. Prediction errors for dynamic and static AIM models are compared for various simulated datasets. Monetary data are also used to evaluate the AIM specifications. There is substantial evidence that an AR(1) correction considerably improves the quality of low-order finite approximations of AIM with the cost of estimating only one additional parameter. Furthermore, restricting a dynamic AIM to approximate only linear homogenous functions often results in severe misspecification.

Microeconomic foundations of an optimal currency area

Abstract The concept of an optimum currency area has previously been developed using macroeconomic policy results and factor mobility as the criteria for the optimum extent of a common currency area. In this paper, microeconomic foundations for an optimum currency area are set forth. These microeconomic foundations are requirements for a common currency area to exist. One can test for consistency with these microeconomic foundations. Procedures for such tests are discussed. Some preliminary results are presented from tests of whether or not the Euro Area economies constitute a common currency area. The test results tentatively suggest that the Euro Area countries may encounter problems in their attempt to establish a common currency.

A Revealed Preference Analysis of Friedman and Schwartz Money

In their seminal series of books Friedman and Schwartz concluded that the appropriate assets to aggregate into money are currency, demand deposits and time deposits issued by commercial banks. For this paper I used revealed preference analysis to test the validity of this conclusion. I find that these financial assets pass tests for the existence of a monetary aggregate consistent with the economic theory of aggregation over goods. For a short period after World War II, the data are consistent with a more broadly defined monetary aggregate. A reputable index number like the Divisia index must be employed to form these assets into an aggregate consistent with the economic theory of aggregation. Copyright 1995 by Ohio State University Press.

Can a sub-optimal tournament be optimal when the prize can be collectively consumed? The case of college football's national championship

One of the most heated debates in all of sports is the annual debate over major college footballs national champion. Since its implementation in 1995, the Bowl Championship Series (BCS) system has often failed to quell the controversy concerning what team is the Division 1 Football Bowl Subdivision football champion. Many of the BCS controversies have spawned changes in the title selection format, while others are perhaps the result of certain changes. What remains now is the cry from some college football fans for an expanded ‘national championship playoff,’ though college and university presidents and many college football coaches continue to resist these cries. We try to explain this resistance to expanding the number of teams invited to compete for the BCS championship and the persistence of the two team playoff format in college football. For three championship eras–pre-BCS, BCS and a futuristic post-BCS expanded playoff–we first relate some of the controversial details to concepts such as optimal tournaments and the public goods concept of collective consumption.

Bounding an Economic Monetary Aggregate under Nonhomothetic Preferences

We construct nonparametric bounds on true-quantity indexes for the realistic case of nonhomothetic preferences. These bounds do not require assumptions about the form of the underlying aggregator function. We construct these bounds using monetary assets that meet necessary conditions for the existence of an aggregate. We find that a Tornqvist index of these monetary assets falls within the nonparametric bounds on true-quantity indexes almost all of the time, whereas a simple sum of these monetary assets falls outside these bounds more than one-third of the time.

The Changing Empirical Definition of Money: A Comment

In a recent issue of this Journal, Belongia and Chalfant (1989) suggested that several groups of financial assets formed monthly economic monetary aggregates from January 1983 through February 1986. They based these findings on nonparametric revealed preference tests developed by Varian (1982, 1983). They implemented these tests using nominal assets data. Implementing these tests with nominal data is inconsistent with a neoclassical framework of consumer choice based on real variables. We find that their use of nominal data led Belongia and Chalfant to obtain results different from those they would have obtained if they had used real assets data. We reran their tests using real data and found that none of the monetary aggregates they identified can be shown to be consistent with the existence of an economic aggregate.