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Consumption heterogeneity, employment dynamics, and macroeconomic co-movement

  • Eusepi, Stefano

    (Federal Reserve Bank of New York)

  • Preston, Bruce

    (Monash University)

Real-business-cycle models necessarily rely on total factor productivity shocks to explain the observed co-movement between consumption, investment, and hours. However, an emerging body of evidence identifies "investment shocks" as important drivers of business cycles. This paper shows that a neoclassical model consistent with observed heterogeneity in labor supply and consumption across employed and nonemployed can generate co-movement in response to fluctuations in the marginal efficiency of investment. Estimation reveals that these shocks explain the bulk of business-cycle variance in consumption, investment, and hours. A corollary of the model's empirical success is that the labor wedge is not important at business-cycle frequencies.

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Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 399.

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Length: 55 pages
Date of creation: 2009
Date of revision: 01 Sep 2013
Handle: RePEc:fip:fednsr:399
Note: Previous title: “Labor Supply Heterogeneity and Macroeconomic Comovement” For a published version of this report, see Stefano Eusepi and Bruce Preston, "Consumption Heterogeneity, Employment Dynamics, and Macroeconomic Co-movement," Journal of Monetary Economics 71 (April 2015): 13-32.
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