Non-convexities in quantitative general equilibrium studies of business cycles

Edward C. Prescott

No 312, Staff Report from Federal Reserve Bank of Minneapolis

Abstract: This paper reviews the role of micro non-convexities in the study of business cycles. One important non-convexity arises because an individual can work only one workweek length in a given week. The implication of this non-convexity is that the aggregate intertemporal elasticity of labor supply is large and the principal margin of adjustment is in the number employed-not in the hours per person employed-as observed. The paper also reviews a business cycle model with an occasionally binding capacity constraint. This model better mimics business cycle fluctuations than the standard real business cycle model. Aggregation in the presence of micro non-convexities is key in the model.

Keywords: Business cycles; Equilibrium (Economics); Econometric models; Labor supply (search for similar items in EconPapers)
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Date: 2003
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Working Paper: Non-Convexities in Quantitative General Equilibrium Studies of Business Cycles (2003)
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