Econometrica: Sep 1978, Volume 46, Issue 5

The Demand for Leisure and Money<1025:TDFLAM>2.0.CO;2-S
p. 1025-1043

Louis Phlips

The paper constructs and estimates an augmented system of dynamic demand equations in which the demand for leisure and the demand for transactions balances are imbedded. The Budget constraint, redefined in terms of full income, appears as an argument in the wealth constraint, which in turn provides a way of introducing real money balances in the short run utility function without explicitly introducing prices in it. In the long run, prices do appear in the utility function, but their impact turns out to be negligible in practice. The generalized Stone-Geary utility function, on which the system is based, allows for both habit formation and stock effects. The demand for leisure, in the U.S., appears to be strongly habit forming, in the sense that the minimum number of leisure hours increases steadily over time in the short run and with the implication that adjustment to long run equilibrium is slow. In both runs, the supply of labor is slightly backward bending. The demand for transaction balances, on the contrary, does not display any dynamic behavior and is rather insensitive to changes in the rate of interest.

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