With respect to functional forms, both the linear and logarithmic forms of the equations were tried, and the decision was made fairly early in the process to use the linear form.
STOCHASTIC EQUATIONS
(1, 2, 3, 4, 5, 6, 7, 8) It will be useful in discussing these results to consider the effects of each explanatory variable across the eight equations.
1. The results for the asset variable are good in the sense that this variable is significant in all four of the expenditure equations.
2. The wage rate and price variables are significant in all four expenditure equations with the exceptions of the housing investment equation and the consumption of services equation.
3. With respect to the interest rate variables, the short-term rate is in the first two equations and the long-term rate is in the third and fourth equations. The coefficient estimates are significant except for one coefficient.
4. The results for the non-labour income variables are not very strong.
5. The labour constraint variable appears in three expenditure equations and three labour supply equations. It is significant in all but equation (1).
In general, these results seem fairly supportive of the theory.
OTHER RESULTS FROM THE SEARCHING PROCEDURE
In the process of searching for the final equations to be used in the model, one gets a feeling for what the data do and do not support. M
Merely presenting the final set of equations does not always convey this information; it is sometimes helpful to present a few of the intermediate results.
1. The results are not sensitive to the use of the measure of labour market tightness in the construction of the labour constraint variable.
2. The data do not support the use of real interest rates in the expenditure equations.
3. The data do not support the treatment of consumer durable expenditures as investment expenditures.
4. The data provide mild support for the use of the after-tax wage rate rather than the before-tax wage rate in the equations.
5. The data again provide mild support for the use of the after-tax interest rates rather than the before-tax rates.
6. It should also be noted with respect to the treatment of taxes that the non-labour income variable is after-tax non-labour income. This treatment is again in keeping with the theoretical model.
DEMAND FOR MONEY
(9) This equation is consistent with the theoretical model, where the optimal level of money holdings of the household is a negative function of the interest rate.
SUMMARY AND FURTHER DISCUSSION
A decrease in tax rates increases expenditures through the wage rate and non-labour income variables. A decrease in tax rates also decreases expenditures through the interest rate variables.