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The Role of Consumption-Labor Complementarity as a Source of Macroeconomic Instability

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Abstract

The equilibrium ramification of a balanced budget rule are scrutinized in a one sector growth model augmented with investment frictions and a non-separable utility function in consumption and leisure. Edgeworth-complementarity between consumption and labor is formulated so as to generate a positive co-movement of consumption, output, and hours worked, as found in the data. Calibration of the model to the U.S. economy provides evidence that a balanced budget rule with a Taylor type monetary policy induce determinate equilibria.

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Bibliographic Info

Paper provided by University of Haifa, Department of Economics in its series Working Papers with number WP2010/3.

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Length: 24
Date of creation:
Date of revision: 01 Jun 2010
Handle: RePEc:haf:huedwp:wp201003

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Postal: Mount Carmel, Haifa, 31905, Israel
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Web page: http://hevra.haifa.ac.il/econ/en/
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Keywords: Fiscal-Monetary policy; Non-Separable Utility; Consumption-Labor Complementarity; Endogenous Labor; Stabilization; Determinacy; Investment;

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  1. Jess Benhabib & Stephanie Schmitt-Grohe & Martin Uribe, 2002. "Avoiding Liquidity Traps," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 110(3), pages 535-563, June.
  2. Benhabib, Jess & Schmitt-Grohé, Stephanie & Uribe, Martín, 1999. "Monetary Policy and Multiple Equilibria," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2316, C.E.P.R. Discussion Papers.
  3. Evans, George W. & Guesnerie, Roger, 2005. "Coordination on saddle-path solutions: the eductive viewpoint--linear multivariate models," Journal of Economic Theory, Elsevier, Elsevier, vol. 124(2), pages 202-229, October.
  4. Miles S. Kimball & Matthew D. Shapiro, 2008. "Labor Supply: Are the Income and Substitution Effects Both Large or Both Small?," NBER Working Papers 14208, National Bureau of Economic Research, Inc.
  5. Cogley, Timothy & Nason, James M, 1995. "Output Dynamics in Real-Business-Cycle Models," American Economic Review, American Economic Association, American Economic Association, vol. 85(3), pages 492-511, June.
  6. Bill Dupor, 2000. "Investment and Interest Rate Policy," Econometric Society World Congress 2000 Contributed Papers, Econometric Society 0007, Econometric Society.
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