Testing specifications of economic agents' intertemporal optimum problems in the presence of alternative models

This paper develops statistics for testing the null specification of an economic agent’s intertemporal optimum problem, that incorporate information about a specific non-nested alternative specification. The disturbances may be serially correlated and conditionally heteroskedastic. An optimal test in developed for a local alternative that reflects the specification of the alternative optimum problem through a term representing the ‘best’ approximation of the null model by the non-nested alternative model. Then, the procedures are implemented to study monetary and non-monetary models of consumption and portfolio decisions.