Elasticities of Substitution in Real Business Cycle Models with Home Production

John Y. Campbell () and Sydney C. Ludvigson ()

No 6763, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper constructs a simple model of home production that demonstrates the connection between the intertemporal elasticity of substitution in market consumption (IES) and the static elasticity of substitution between home and market consumption (SES), when the utility function is additively separable over home and market consumption. Understanding this connection is important because there is a large body of empirical evidence suggesting that the IES is small, but little evidence on the size of the SES. We use our framework to shed light on the properties of a home production model with a low IES. We find that such a model must have two fundamental properties in order to match key aspects of the U.S. aggregate data. First, the steady-state growth rate of technology must be the same across sectors. Second, shocks to technology must be sufficiently positively correlated across sectors.

New Economics Papers: this item is included in nep-dge
Date: Written 1998-10
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Published as Campbell, John Y. and Syndney Ludvigson. "Elasticities Of Substitution In Real Business Cycle Models With Home Production," Journal of Money, Credit and Banking, 2001, v33(4,Nov), 847-875.

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Related works:
Working Paper: Elasticities of Substitution in Real Business Cycle Models with Home Production (2000)
Working Paper: Elasticities of substitution in real business cycle models with home production (1997)
Journal Article: Elasticities of Substitution in Real Business Cycle Models with Home Protection (2001)
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