IDEAS home Printed from https://ideas.repec.org/p/qed/wpaper/788.html
   My bibliography  Save this paper

Ex Post Heterogeneity and the Business Cycle

Author

Listed:
  • Jang-Ok Cho

Abstract

The reason why the assumption of a representative agent is so popular in the equilibrium business cycle literature is mainly that equilibrium allocations are derived by solving a concave programming problem, whereas once heterogeneity is introduced it is necessary to solve for weights on individual utilities and this generally involves solving a complicated fixed point problem. The representative agent framework is extended in a way that permits workers to have different skills. The key feature is that each agent faces a stochastic productivity ex ante but a different realized productivity ex post from others'. This means that there is no ex ante heterogeneity but ex post heterogeneity, and hence an equal weight is applied to the utilities of all agents. The results show how serious the aggregation problem is in aggregate fluctuations. The responsiveness of labor supply in physical units is larger than that of labor supply in efficiency units. On the contrary, productivity in physical units responds to the aggregate productivity shock less vigorously than productivity in efficiency units. So the relative ratio of standard deviation of aggregate hours to that of productivity tends to be exaggerated in the actual data, which measures the aggregate labor supply only in physical unit. In addition, a heterogeneity helps the model economy produce a more plausible correlation structure. Furthermore, the results show that a high elasticity of intertemporal substitution of labor is not required for a real business cycle model to mimic the key feature observed in the actual economy.

Suggested Citation

  • Jang-Ok Cho, 1990. "Ex Post Heterogeneity and the Business Cycle," Working Papers 788, Queen's University, Department of Economics.
  • Handle: RePEc:qed:wpaper:788
    as

    Download full text from publisher

    File URL: http://qed.econ.queensu.ca/working_papers/papers/qed_wp_788.pdf
    File Function: First version 1990
    Download Restriction: no

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:qed:wpaper:788. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mark Babcock). General contact details of provider: http://edirc.repec.org/data/qedquca.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.