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Consumption heterogeneity, employment dynamics and macroeconomic co-movement

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  • Eusepi, Stefano
  • Preston, Bruce

Abstract

Real-business-cycle models rely on total factor productivity (TFP) shocks to explain the observed co-movement among consumption, investment and hours. However an emerging body of evidence identifies “investment shocks” as important drivers of business cycles. This paper shows that a neoclassical model consistent with observed heterogeneity in labor supply and consumption across employed and non-employed can generate co-movement in response non-TFP shocks. Estimation reveals fluctuations in the marginal efficiency of investment that explain the bulk of business-cycle variance in consumption, investment and hours. A corollary of the model׳s empirical success is the labor wedge that is not important at business-cycle frequencies.

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  • Eusepi, Stefano & Preston, Bruce, 2015. "Consumption heterogeneity, employment dynamics and macroeconomic co-movement," Journal of Monetary Economics, Elsevier, vol. 71(C), pages 13-32.
    • Handle: RePEc:eee:moneco:v:71:y:2015:i:c:p:13-32
    DOI: 10.1016/j.jmoneco.2014.08.002
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    4. Francesco Furlanetto & Martin Seneca, 2010. "Investment-specific technology shocks and consumption," Working Paper 2010/30, Norges Bank.
    5. Munechika Katayama & Kwang Hwan Kim, 2018. "Intersectoral Labor Immobility, Sectoral Comovement, and News Shocks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 50(1), pages 77-114, February.
    6. Piero Ferri, 2011. "Macroeconomics of Growth Cycles and Financial Instability," Books, Edward Elgar Publishing, number 14260.
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    9. Hikaru Saijo & Cosmin Ilut, 2015. "Learning, Confidence, and Business Cycles," 2015 Meeting Papers 917, Society for Economic Dynamics.
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    12. Ruy Lama & Gustavo Leyva & Carlos Urrutia, 2022. "Labor Market Policies and Business Cycles in Emerging Economies," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 70(2), pages 300-337, June.
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    21. Florin O. Bilbiie, 2011. "Nonseparable Preferences, Frisch Labor Supply, and the Consumption Multiplier of Government Spending: One Solution to a Fiscal Policy Puzzle," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(1), pages 221-251, February.
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    More about this item

    Keywords

    Business cycles; Investment shocks; Heterogeneity; Labor market dynamics;
    All these keywords.

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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