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An equilibrium model of the business cycle with household production and fiscal policy

  • Ellen R. McGrattan
  • Richard Rogerson
  • Randall Wright

We estimate a dynamic general equilibrium model of the U.S. economy that includes an explicit household production sector and stochastic fiscal variables. We use our estimates to investigate two issues. First, we analyze how well the model accounts for aggregate fluctuations. We find that household production has a significant impact and reject a nested specification in which changes in the home production technology do not matter for market variables. Second, we study the effects of some simple fiscal policy experiments and show that the model generates different predictions for the effects of tax changes than similar models without home production.

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Paper provided by Federal Reserve Bank of Minneapolis in its series Staff Report with number 191.

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Date of creation: 1995
Date of revision:
Publication status: Published in International Economic Review (Vol 38, Num 2, May 1997, pp. 267-290)
Handle: RePEc:fip:fedmsr:191
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  1. McGrattan, Ellen R., 1994. "The macroeconomic effects of distortionary taxation," Journal of Monetary Economics, Elsevier, vol. 33(3), pages 573-601, June.
  2. Gary Hansen, 2010. "Indivisible Labor and the Business Cycle," Levine's Working Paper Archive 233, David K. Levine.
  3. Christiano, Lawrence J., 1988. "Why does inventory investment fluctuate so much?," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 247-280.
  4. Juster, F. Thomas & Stafford, Frank P., 1990. "The Allocation of Time: Empirical Findings, Behavioural Models, and Problems of Measurement," Working Paper Series 258, Research Institute of Industrial Economics.
  5. Greenwood, Jeremy & Hercowitz, Zvi, 1991. "The Allocation of Capital and Time over the Business Cycle," Journal of Political Economy, University of Chicago Press, vol. 99(6), pages 1188-214, December.
  6. Anton Braun, R., 1994. "Tax disturbances and real economic activity in the postwar United States," Journal of Monetary Economics, Elsevier, vol. 33(3), pages 441-462, June.
  7. Benhabib, Jess & Rogerson, Richard & Wright, Randall, 1991. "Homework in Macroeconomics: Household Production and Aggregate Fluctuations," Journal of Political Economy, University of Chicago Press, vol. 99(6), pages 1166-87, December.
  8. Peter Rupert & Richard Rogerson & Randall Wright, 1994. "Estimating substitution elasticities in household production models," Staff Report 186, Federal Reserve Bank of Minneapolis.
  9. Altug, Sumru, 1989. "Time-to-Build and Aggregate Fluctuations: Some New Evidence," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(4), pages 889-920, November.
  10. Christiano, Lawrence J & Eichenbaum, Martin, 1992. "Current Real-Business-Cycle Theories and Aggregate Labor-Market Fluctuations," American Economic Review, American Economic Association, vol. 82(3), pages 430-50, June.
  11. Finn E. Kydland (ed.), 1995. "Business Cycle Theory," Books, Edward Elgar, number 565, April.
  12. Finn E. Kydland, 1993. "Business cycles and aggregate labor-market fluctuations," Working Paper 9312, Federal Reserve Bank of Cleveland.
  13. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
  14. Joines, Douglas H, 1981. "Estimates of Effective Marginal Tax Rates on Factor Incomes," The Journal of Business, University of Chicago Press, vol. 54(2), pages 191-226, April.
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