Consumption heterogeneity,employment dynamics and macroeconomic co-movement |
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| Institution: | 1. Federal Reserve Bank of New York, 33 Liberty St, New York, NY 10045, USA;2. Monash University, 900 Dandenong Rd, Building H, Caulfield, VIC 3145, Australia;1. École Polytechnique Fédérale de Lausanne, Switzerland;2. International Monetary Fund, 700 19th Street, N.W., Washington, D.C. 20431, United States;1. Federal Reserve Board, Division of International Finance, 20th Street and Constitution Avenue NW, Washington, DC 20551, United States;2. Johns Hopkins University, School of Advanced International Studies, 1717 Massachusetts Avenue NW, Washington, DC 20036, United States;1. Bank of Italy, Via Nazionale 91, 00184 Rome, Italy;2. European Central Bank, Kaiserstrasse 2960311 Frankfurt am Main, Germany;3. Monetary and Economic Department, Bank for International Settlements, Centralbahnplatz 2, CH-4002 Basel, Switzerland;1. London Business School, Regent?s Park, London NW1 4SA, United Kingdom;2. Department of Economics, University of Leicester, Leicester LE1 7RH, United Kingdom;1. Federal Reserve Bank of St. Louis, United States;2. Simon Fraser University, Canada;3. Washington University in St. Louis, United States |
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| Abstract: | Real-business-cycle models rely on total factor productivity (TFP) shocks to explain the observed co-movement among 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 non-employed can generate co-movement in response non-TFP shocks. Estimation reveals fluctuations in the marginal efficiency of investment that explain the bulk of business-cycle variance in consumption, investment and hours. A corollary of the model?s empirical success is the labor wedge that is not important at business-cycle frequencies. |
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| Keywords: | Business cycles Investment shocks Heterogeneity Labor market dynamics |
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