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Reconciling Jaimovich–Rebello preferences, habit in consumption and labor supply

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  • Holden, Tom
  • Levine, Paul
  • Swarbrick, Jonathan

Abstract

This note studies a form of a utility function of consumption with habit and leisure that (a) is compatible with long-run balanced growth, (b) hits a steady state observed target for hours worked and (c) is consistent with micro-econometric evidence for the inter-temporal elasticity of substitution and the Frisch elasticity of labor supply. Employing Jaimovich–Rebello preferences our results highlight a constraint on the preference parameter needed to target the steady-state Frisch elasticity. This leads to a lower bound for the latter that cannot be reconciled empirically with external habit, but the introduction of a labor wedge solves the problem. We also propose a dynamic Frisch inverse elasticity measure and examine its business cycle properties.

Suggested Citation

  • Holden, Tom & Levine, Paul & Swarbrick, Jonathan, 2018. "Reconciling Jaimovich–Rebello preferences, habit in consumption and labor supply," Economics Letters, Elsevier, vol. 168(C), pages 132-137.
  • Handle: RePEc:eee:ecolet:v:168:y:2018:i:c:p:132-137
    DOI: 10.1016/j.econlet.2018.04.013
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    1. Florin O. Bilbiie, 2011. "Nonseparable Preferences, Frisch Labor Supply, and the Consumption Multiplier of Government Spending: One Solution to a Fiscal Policy Puzzle," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(1), pages 221-251, February.
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    3. Battiati, Claudio, 2019. "R&D, growth, and macroprudential policy in an economy undergoing boom-bust cycles," Journal of Macroeconomics, Elsevier, vol. 59(C), pages 299-324.

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    More about this item

    Keywords

    Jaimovich–Rebello preferences; Habit in consumption; Labor supply; Dynamic Frisch elasticity; Labor wedge;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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