Consumption heterogeneity, employment dynamics and macroeconomic co-movement

Stefano Eusepi, Bruce James Preston

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13 Citations (Scopus)


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[U+05F3]s empirical success is the labor wedge that is not important at business-cycle frequencies.
Original languageEnglish
Pages (from-to)13 - 32
Number of pages20
JournalJournal of Monetary Economics
Publication statusPublished - 2015

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