Journal article

Consumption heterogeneity, employment dynamics and macroeconomic co-movement

Stefano Eusepi, Bruce Preston

Journal of Monetary Economics | ELSEVIER | Published : 2015

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[U+05F3]s empirical success is the labor wedge that is n..

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University of Melbourne Researchers