Consider the following two models (refer to Pesaran and Deaton 1978):
One particular way of choosing between the two hypotheses is the Jtest, suggested by Davidson and Mackinnon (1981). Estimate the comprehensive model
This example illustrates a way to test the specification of a consumption function. The extension of this example to other nonnested models and multiple hypotheses is straightforward.
An alternative is to estimate an equation containing lagged consumption as an explanatory variable. This can be thought of as a variant of Duesenberry's (1949) relative income hypothesis. The model can be postulated as
As seen above, the H_{1} and H_{2} models are nonnested.
The comprehensive models
The data set consists of seasonally adjusted quarterly time series of real 1958 prices, consumers' expenditure on nondurable goods and personal disposable income. These were collected from the Survey of Current Business and are used by Pesaran and Deaton (1978).
data spec; input yr qr c y w; c_lag=lag(c); date = yyq( yr, qr ); format date yyqc.; datalines; 1954 2 253 270 0 1954 3 257 274 17 1954 4 262 279 34 1955 1 268 282 51 ... ; run;
Before the Jtest can be performed, the fitted values from the two models must be calculated. The AUTOREG procedure can fit several different regressions with the inclusion of multiple model statements. In this example, two model statements are used, corresponding to the two hypotheses. For each MODEL statement an output data set is created with the OUT= option. These data sets contain the predicted values CHAT1 and CHAT2, as specified by the P= option. The DATA step merges the original data set with the two predicted data sets for use in the Jtest.
proc autoreg data=spec ; model c = y w; /* model for H1 */ output out=model1 p=chat1; model c = y c_lag; /* model for H2 */ output out=model2 p=chat2; run; data spec2; set spec ; set model1; set model2;
Because of the limits of the Jtest, it is often wise to test twice for the significance of the mixing parameter by reversing the roles of the hypotheses. The AUTOREG procedure estimates the two comprehensive models. The coefficients of CHAT1 and CHAT2 correspond to a test of the significance of the mixing parameter, . To reject a model requires that the mixing parameter be insignificantly different from 0.
proc autoreg data=spec2; model c = y c_lag chat1; model c = y w chat2; run;
The first comprehensive model yields the following parameter estimates:
pvalue of 0.7021. Thus, H_{1} should be rejected in favor of H_{2}.The second comprehensive model yields the following parameter estimates:

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