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Consumption-Leisure Trade-offs and Persistency in Business Cycles

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Author Info
Ilaski Barañano () (Dpt. Fundamentos Análisis Económico I, UPV/EHU)
Paz Moral () (Dpt. Economía Aplicada III (Econometría y Estadística), UPV/EHU)

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Abstract

This paper studies whether nonseparabilities between consumption and leisure may help to explain the observed persistence in GNP growth. We consider an extended version of Lucas' (1988) human capital investment model that includes labor adjustment costs and compare its performance under different utility specifications with different degrees of complementarity and substitutability between consumption and leisure. We find that when consumption and leisure are complements the model succeeds in matching not only the autocorrelation of output growth but also the important trend-reverting component found in US data. These results hold even if low adjustment costs of labor are considered. Hence, we conclude that an arguably simple margin not studied previously can provide useful insights into observed business cycle patterns.

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Paper provided by Universidad del País Vasco - Departamento de Economía Aplicada III (Econometría y Estadística) in its series BILTOKI with number 200705.

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Date of creation: 12 Dec 2007
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Handle: RePEc:ehu:biltok:200705

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Postal: Dpto. de Econometría y Estadística, Facultad de CC. Económicas y Empresariales, Universidad del País Vasco, Avda. Lehendakari Aguirre 83, 48015 Bilbao, Spain
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Related research
Keywords: Real Business Cycle Models; Endogenous Growth; Propagation Mechanism; Persistence.;

Find related papers by JEL classification:
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
O41 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation and Testing

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