In a world of perfect certainty and perfect capital markets agents
allocate expenditure in such a way that the marginal utility of discounted
expenditure is the same in each period. In this paper we present a test of
whether any particular series of discounted prices and quantities can be
exactly reconciled with a utility function and marginal utility of
discounted expenditure that do not change from period to period. We find
that U.K., U.S. and Canadian postwar aggregate data all reject our
condition, although it is not rejected for long sub-periods. We show that
our results for the U.K. suggest particular modifications to the strong
form of the rational expectations hypothesis that our conditions test. In
fact these data are exactly consistent with a number of alternative
hypotheses. From this we argue that time series data are ill suited to
parametric testing of any of the competing hypotheses on the
inter-temporal allocation of expenditure. Copyright 1989 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.
