Consumption heterogeneity, employment dynamics and macroeconomic co-movement

Stefano Eusepi and Bruce Preston

Journal of Monetary Economics, 2015, vol. 71, issue C, 13-32

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.

Keywords: Business cycles; Investment shocks; Heterogeneity; Labor market dynamics (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (15)

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Working Paper: Consumption heterogeneity, employment dynamics, and macroeconomic co-movement (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:71:y:2015:i:c:p:13-32

DOI: 10.1016/j.jmoneco.2014.08.002

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