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The Intertemporal Substitution Model of Labor Supply in an Open Economy

Author

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  • João Ricardo Faria
  • Miguel León-Ledesma

Abstract

The intertemporal substitution model of labor supply has been based on closed economy models. This paper studies the intertemporal substitution hypothesis in an open economy. It derives the long run labor supply as a function of the real wage, real interest rate and real exchange rate from a standard open economy optimizing representative agent model. The paper tests the steady state solution of the model for the US and, in order to avoid the Lucas critique, it tests for the superexogeneity of the interest rate and exchange rate. In accordance with the theory, the empirical evidence is supportive of the intertemporal substitution hypothesis, the significant impact of the real exchange rate, and is robust to the Lucas critique.

Suggested Citation

  • João Ricardo Faria & Miguel León-Ledesma, 2000. "The Intertemporal Substitution Model of Labor Supply in an Open Economy," Studies in Economics 0009, School of Economics, University of Kent.
    • Handle: RePEc:ukc:ukcedp:0009
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    References listed on IDEAS

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    Cited by:

    1. Hoon, Hian Teck & Phelps, Edmund S., 2007. "A structuralist model of the small open economy in the short, medium and long run," Journal of Macroeconomics, Elsevier, vol. 29(2), pages 227-254, June.

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    More about this item

    Keywords

    Intertemporal substitution; Labor supply; Interest rate; Exchange rate;
    All these keywords.

    JEL classification:

    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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