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Learning-by-Doing or Habit Formation?

  • Hafedh Bouakez

    (HEC Montreal)

  • Takashi Kano

    (Bank of Canada)

In a recent paper, Chang, Gomes, and Schorfheide (American Economic Review 2002, p. 1498-1520) extend the standard real business cycle (RBC) model to allow for a learning-by-doing (LBD) mechanism whereby current labor supply affects future productivity. They show that this feature magnifies the propagation of shocks and improves the matching performance of the standard RBC model. In this paper, we show that the LBD model is nearly observationally equivalent to an RBC model with habit formation in labor (or, equivalently, in leisure). Under the same calibration of the parameters, the two models share the same equilibrium paths of output, consumption, and investment, but have different implications for hours worked. Using Bayesian techniques, we investigate which of the LBD and Habit models fits the U.S. data better. Our results suggest that the Habit specification is more strongly supported by the data. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/j.red.2006.02.003
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Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 9 (2006)
Issue (Month): 3 (July)
Pages: 508-524

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Handle: RePEc:red:issued:v:9:y:2006:i:3:p:508-524
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  1. Alok Johri and Marc-André Letendre, 2006. "What do “residuals” from first-order conditions reveal about DGE models?," Department of Economics Working Papers 2006-01, McMaster University.
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  16. Lettau, M. & Uhlig, H.F.H.V.S., 1995. "Can Habit Formation be Reconciled with Business Cycle Facts?," Discussion Paper 1995-54, Tilburg University, Center for Economic Research.
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  18. Nakajima, Tomoyuki, 2005. "A business cycle model with variable capacity utilization and demand disturbances," European Economic Review, Elsevier, vol. 49(5), pages 1331-1360, July.
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