Although it is well known that aggregate variables have slow-moving stochastic components, research on macroeconomic fluctuations has focused primarily on high-frequency movements of the data. I document some interesting lower-frequency facts in U.S. postwar data and investigate whether dynamic stochastic general equilibrium (DSGE) models can explain these facts. One fact of particular interest is that hours worked per capita is negatively correlated with both output per capita and total factor productivity at lower frequencies, in stark contrast to the positive comovement of these three variables at high frequencies. I show that this lower-frequency fact is puzzling for many DSGE models and explore a variety of candidate solutions to the puzzle. I demonstrate that preferences which depend on a time-varying reference level of consumption ("living standards") can rationalize the observed patterns. Finally, I discuss the relative merits of the "living standards" interpretation of the model to other alternatives
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Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number
752.
Length: Date of creation: 03 Dec 2006 Date of revision: Handle: RePEc:red:sed006:752
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Find related papers by JEL classification: E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
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