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Costly Labor Reallocation, Non-Separable Preferences, and Expectation Driven Business Cycles

A key feature of the business cycle data is that output, employment and investment move up and down together in di erent sectors of the economy. However, standard business cycle models fail to generate this business cycle sectoral co-movement. In this paper we propose a two-sector business cycle model that generates the sectoral cycle co-movement in response to both contemporaneous shocks and news shocks about fundamentals. The key elements to the model’s success are frictions in intersectoral labor mobility and non-separable preferences in consumption and leisure, along with adjustment costs to investment and variable capital utilization.

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File URL: http://bus.lsu.edu/McMillin/Working_Papers/pap10_05.pdf
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Paper provided by Department of Economics, Louisiana State University in its series Departmental Working Papers with number 2010-05.

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Handle: RePEc:lsu:lsuwpp:2010-05
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  1. Nir Jaimovich & Sergio Rebelo, 2006. "Can News About the Future Drive the Business Cycle?," NBER Working Papers 12537, National Bureau of Economic Research, Inc.
  2. Reinhart, Carmen & Ogaki, Masao, 1995. "Measuring intertemporal substitution: The role of durable goods," MPRA Paper 13690, University Library of Munich, Germany.
  3. Miles S. Kimball & Matthew D. Shapiro, 2008. "Labor Supply: Are the Income and Substitution Effects Both Large or Both Small?," NBER Working Papers 14208, National Bureau of Economic Research, Inc.
  4. Thomas J. Sargent, 1978. "Estimation of dynamic labor demand schedules under rational expectations," Staff Report 27, Federal Reserve Bank of Minneapolis.
  5. Davis, Steven J. & Haltiwanger, John, 2001. "Sectoral job creation and destruction responses to oil price changes," Journal of Monetary Economics, Elsevier, vol. 48(3), pages 465-512, December.
  6. Den Haan, Wouter & Kaltenbrunner, Georg, 2007. "Anticipated Growth and Business Cycles in Matching Models," CEPR Discussion Papers 6063, C.E.P.R. Discussion Papers.
  7. Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, vol. 78(3), pages 402-17, June.
  8. Timothy Cogley & James M. Nason, 1993. "Output dynamics in real business cycle models," Working Papers in Applied Economic Theory 93-10, Federal Reserve Bank of San Francisco.
  9. Piazzesi, Monika & Schneider, Martin & Tuzel, Selale, 2007. "Housing, consumption and asset pricing," Journal of Financial Economics, Elsevier, vol. 83(3), pages 531-569, March.
  10. Gregory W. Huffman & Mark A. Wynne, 1995. "The role of intratemporal adjustment costs in a multi-sector economy," Working Papers 9508, Federal Reserve Bank of Dallas.
  11. Robert Shimer, 2009. "Convergence in Macroeconomics: The Labor Wedge," American Economic Journal: Macroeconomics, American Economic Association, vol. 1(1), pages 280-97, January.
  12. Michele Boldrin & Lawrence J. Christiano & Jonas D. M. Fisher, 2000. "Habit persistence, asset returns and the business cycle," Staff Report 280, Federal Reserve Bank of Minneapolis.
  13. Florin O. Bilbiie, 2009. "Nonseparable Preferences, Fiscal Policy Puzzles, and Inferior Goods," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(2-3), pages 443-450, 03.
  14. Baxter, Marianne, 1996. "Are Consumer Durables Important for Business Cycles?," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 147-55, February.
  15. Stefano Eusepi & Bruce Preston, 2009. "Labor supply heterogeneity and macroeconomic comovement," Staff Reports 399, Federal Reserve Bank of New York.
  16. Munechika Katayama & Kwang Hwan Kim, . "Intertemporal Substitution and Sectoral Comovement in a Sticky Price Model," Departmental Working Papers 2010-01, Department of Economics, Louisiana State University.
  17. Christiano, Lawrence & Ilut, Cosmin & Motto, Roberto & Rostagno, Massimo, 2008. "Monetary policy and stock market boom-bust cycles," Working Paper Series 0955, European Central Bank.
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