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Intertemporal Substitution in Macroeconomics: Evidence from a Two-Dimensional Labour Supply Model with Money

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  • Ali Dib
  • Louis Phaneuf

Abstract

The hypothesis of intertemporal substitution in labour supply has a history of empirical failure when confronted with aggregate time-series data. The authors show that a two-dimensional labour supply model, adapted to an environment with money as originally proposed by Lucas and Rapping (1969) and Lucas (1972), performs very well. The overidentifying restrictions implied by the model are far from rejected. The estimated parameters of preferences are generally stable and meaningful. Furthermore, the estimated wage elasticities of labour supply are much higher than previously found in the literature.

Suggested Citation

  • Ali Dib & Louis Phaneuf, 2005. "Intertemporal Substitution in Macroeconomics: Evidence from a Two-Dimensional Labour Supply Model with Money," Staff Working Papers 05-30, Bank of Canada.
    • Handle: RePEc:bca:bocawp:05-30
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    References listed on IDEAS

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    More about this item

    Keywords

    Business fluctuations and cycles; Labour markets; Econometric and statistical methods;
    All these keywords.

    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

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