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Multiplicatively Separable Preferences and Output Persistence

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  • Andrea Vaona

    (Department of Economics, Mathematics & Statistics, Birkbeck)

Abstract

In the New-Neoclassical Synthesis literature it is customary to use additively separable preferences, very often not campatible with long-run productivity growth and trend infation. The present paper shows that using multiplicatively separable preferences it is possible to gain further insight on the persistence mechanics of this class of models. In particular it is showed that the more leisure and the money-consumption bundle are Edgeworth complement and the less persistent are output deviations after a monetary shock. The basic intuition for this result is that an increase in money supply not only induces economic agents to increase their labour supply, but also raises the opportunity cost for this choice given that agents with more money in their pockets and greater consumption would like to have more leisure too. In addition, empirical estimates not only support multiplicatively and not additively separable preferences, but highlight new problems for the New-Neoclassical Synthesis given that leisure and money (consumption) appear to be Edgeworth complements and not substitutes.

Suggested Citation

  • Andrea Vaona, 2005. "Multiplicatively Separable Preferences and Output Persistence," Birkbeck Working Papers in Economics and Finance 0511, Birkbeck, Department of Economics, Mathematics & Statistics.
  • Handle: RePEc:bbk:bbkefp:0511
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    File URL: http://www.bbk.ac.uk/ems/research/wp/PDF/BWPEF0511.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Output persistence; multiplicatively separable preferences;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General

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