Consumption and labor supply under dynamic optimization

The goal of this dissertation is to test the hypothesis that economic agents jointly choose current consumption and labor supply, so as to maximize the present discounted value of current and future utility. We then investigate the response of such maximizing agents to transitory and permanent shocks from the exogenous environment consisting of real wages, real interest rates and taxes. The response of consumption is in broad conformity with the predictions of the premanent income hypothesis. Labor supply exhibits an inelastic response with respect to both shocks - a result at odds with an important postulate of the new classical macroeconomics.