Distinguishing transitory nonlinear shocks from permanent structural change

Abstract

Nonparametric tests for structural change based on the axioms of revealed preference have assumed that utility is nonstochastic or that transitory stochastic shocks do not affect the marginal rates of substitution among goods. Under this assumption, a violation of the Axioms implies that a permanent structural change has occurred. This implication is no longer valid if the stochastic nature of utility is generalized to include transitory nonlinear shocks. A new test for structural change is developed and applied to South Korean demand for rice, wheat, and barley.