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The Intertemporal Substitution Model of Labor Supply in an Open Economy

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Author Info
João Ricardo Faria
Miguel León-Ledesma ()

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Abstract

The intertemporal substitution model of labor supply has been based on closed economy models. This paper studies the intertemporal substitution hypothesis in an open economy. It derives the long run labor supply as a function of the real wage, real interest rate and real exchange rate from a standard open economy optimizing representative agent model. The paper tests the steady state solution of the model for the US and, in order to avoid the Lucas critique, it tests for the superexogeneity of the interest rate and exchange rate. In accordance with the theory, the empirical evidence is supportive of the intertemporal substitution hypothesis, the significant impact of the real exchange rate, and is robust to the Lucas critique.

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File URL: ftp://ftp.ukc.ac.uk/pub/ejr/RePEc/ukc/ukcedp/0009.pdf
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Paper provided by Department of Economics, University of Kent in its series Studies in Economics with number 0009.

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Date of creation: Oct 2000
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Handle: RePEc:ukc:ukcedp:0009

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Postal: Department of Economics, University of Kent at Canterbury, Canterbury, Kent, CT2 7NP
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Related research
Keywords: Intertemporal substitution; Labor supply; Interest rate; Exchange rate;

Find related papers by JEL classification:
D90 - Microeconomics - - Intertemporal Choice and Growth - - - General
J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Hall, Robert E., 1980. "Labor supply and aggregate fluctuations," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 12(1), pages 7-33, January. [Downloadable!] (restricted)
  2. Mankiw, N Gregory & Rotemberg, Julio J & Summers, Lawrence H, 1985. "Intertemporal Substitution in Macroeconomics," The Quarterly Journal of Economics, MIT Press, vol. 100(1), pages 225-51, February. [Downloadable!] (restricted)
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  3. Alogoskoufis, George S, 1987. "Aggregate Employment and Intertemporal Substitution in the UK," Economic Journal, Royal Economic Society, vol. 97(386), pages 403-15, June. [Downloadable!] (restricted)
  4. Abowd, John M & Card, David, 1987. "Intertemporal Labor Supply and Long-term Employment Contracts," American Economic Review, American Economic Association, vol. 77(1), pages 50-68, March. [Downloadable!] (restricted)
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  5. Altonji, Joseph G, 1982. "The Intertemporal Substitution Model of Labour Market Fluctuations: An Empirical Analysis," Review of Economic Studies, Blackwell Publishing, vol. 49(5), pages 783-824, Special I. [Downloadable!] (restricted)
  6. Barro, Robert J & King, Robert G, 1984. "Time-separable Preferences and Intertemporal-Substitution Models of Business Cycles," The Quarterly Journal of Economics, MIT Press, vol. 99(4), pages 817-39, November. [Downloadable!] (restricted)
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  7. Dutkowsky, Donald H & Dunsky, Robert M, 1996. "Intertemporal Substitution, Money, and Aggregate Labor Supply," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(2), pages 216-32, May. [Downloadable!] (restricted)
  8. Engle, R. & Hendry, D., 1990. "Testing Super Exogeneity And Invariance In Regression Models," Economics Series Working Papers 99100, University of Oxford, Department of Economics.
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  9. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January. [Downloadable!] (restricted)
  10. Alogoskoufis, George S, 1987. "On Intertemporal Substitution and Aggregate Labor Supply," Journal of Political Economy, University of Chicago Press, vol. 95(5), pages 938-60, October. [Downloadable!] (restricted)
  11. Lindé, Jesper, 2000. "Testing for the Lucas Critique: A Quantitative Investigation," Working Paper Series 113, Sveriges Riksbank (Central Bank of Sweden). [Downloadable!]
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  12. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November. [Downloadable!] (restricted)
  13. David Card, 1991. "Intertemporal Labor Supply: An Assessment," NBER Working Papers 3602, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  14. David F. Hendry & Neil R. Ericsson, 1989. "An econometric analysis of UK money demand in MONETARY TRENDS IN THE UNITED STATES AND THE UNITED KINGDOM by Milton Friedman and Anna J. Schwartz," International Finance Discussion Papers 355, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  15. Dutkowsky, Donald H & Foote, William G, 1992. "Intertemporal Substitution in Macroeconomics: Consumption, Labor Supply, and Money Demand," The Review of Economics and Statistics, MIT Press, vol. 74(2), pages 333-38, May. [Downloadable!] (restricted)
  16. Robert E. Hall, 1980. "Labor Supply and Aggregate Fluctuations," NBER Working Papers 0385, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  17. Lucas, Robert E, Jr & Rapping, Leonard A, 1969. "Real Wages, Employment, and Inflation," Journal of Political Economy, University of Chicago Press, vol. 77(5), pages 721-54, Sept./Oct. [Downloadable!] (restricted)
  18. Amartya Lahiri, 1996. "Macroeconomic Effects of Devaluation Rate Changes: Dynamic implications under alternative regimes of capital mobility," UCLA Economics Working Papers 760, UCLA Department of Economics. [Downloadable!]
  19. Davidson, James E H, et al, 1978. "Econometric Modelling of the Aggregate Time-Series Relationship between Consumers' Expenditure and Income in the United Kingdom," Economic Journal, Royal Economic Society, vol. 88(352), pages 661-92, December. [Downloadable!] (restricted)
  20. Johansen, Soren, 1992. "Determination of Cointegration Rank in the Presence of a Linear Trend," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(3), pages 383-97, August.
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Hian Teck Hoon & Edmund S Phelps, 2005. "A Structuralist Model of the Small Open Economy in the Short, Medium and Long Run," Working Papers 09-2005, Singapore Management University, School of Economics. [Downloadable!]
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