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Multiplicatively Separable Preferences and Output Persistence

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  • Andrea Vaona

    (Department of Economics, Mathematics & Statistics, Birkbeck)

Abstract

In the New-Neoclassical Synthesis literature it is customary to use additively separable preferences, very often not campatible with long-run productivity growth and trend infation. The present paper shows that using multiplicatively separable preferences it is possible to gain further insight on the persistence mechanics of this class of models. In particular it is showed that the more leisure and the money-consumption bundle are Edgeworth complement and the less persistent are output deviations after a monetary shock. The basic intuition for this result is that an increase in money supply not only induces economic agents to increase their labour supply, but also raises the opportunity cost for this choice given that agents with more money in their pockets and greater consumption would like to have more leisure too. In addition, empirical estimates not only support multiplicatively and not additively separable preferences, but highlight new problems for the New-Neoclassical Synthesis given that leisure and money (consumption) appear to be Edgeworth complements and not substitutes.

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File URL: http://www.ems.bbk.ac.uk/research/wp/PDF/BWPEF0511.pdf
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Bibliographic Info

Paper provided by Birkbeck, Department of Economics, Mathematics & Statistics in its series Birkbeck Working Papers in Economics and Finance with number 0511.

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Date of creation: Sep 2005
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Handle: RePEc:bbk:bbkefp:0511

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Keywords: Output persistence; multiplicatively separable preferences;

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  1. Leonardo Soriano de Alencar & Márcio I. Nakane, 2003. "Real Balances in the Utility Function: Evidence for Brazil," Working Papers Series 68, Central Bank of Brazil, Research Department.
  2. Robert G. King & Sergio T. Rebelo, 2000. "Resuscitating Real Business Cycles," NBER Working Papers 7534, National Bureau of Economic Research, Inc.
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  6. Ascari, Guido, 2000. "Optimising Agents, Staggered Wages and Persistence in the Real Effects of Money Shocks," Economic Journal, Royal Economic Society, vol. 110(465), pages 664-86, July.
  7. Karanassou, Marika & Sala, Hector & Snower, Dennis J., 2003. "Unemployment in the European Union: Institutions, Prices, and Growth," IZA Discussion Papers 899, Institute for the Study of Labor (IZA).
  8. Ascari, Guido, 2003. "Staggered prices and trend inflation: some nuisances," Research Discussion Papers 27/2003, Bank of Finland.
  9. Christopher J. Erceg, 1997. "Nominal wage rigidities and the propagation of monetary disturbances," International Finance Discussion Papers 590, Board of Governors of the Federal Reserve System (U.S.).
  10. Huang, Kevin X. D. & Liu, Zheng, 2002. "Staggered price-setting, staggered wage-setting, and business cycle persistence," Journal of Monetary Economics, Elsevier, vol. 49(2), pages 405-433, March.
  11. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 1998. "Sticky price models of the business cycle: can the contract multiplier solve the persistence problem?," Staff Report 217, Federal Reserve Bank of Minneapolis.
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