Consumption-Leisure Trade-offs and Persistency in Business Cycles

Ilaski Barañano Mentxaka and María Paz Moral Zuazo

No 1134-8984, BILTOKI from Universidad del País Vasco - Departamento de Economía Aplicada III (Econometría y Estadística)

Abstract: This paper studies whether nonseparabilities between consumption and leisure may help to explain the observed persistence in GNP growth. We consider an extended version of Lucas' (1988) human capital investment model that includes labor adjustment costs and compare its performance under different utility specifications with different degrees of complementarity and substitutability between consumption and leisure. We find that when consumption and leisure are complements the model succeeds in matching not only the autocorrelation of output growth but also the important trend-reverting component found in US data. These results hold even if low adjustment costs of labor are considered. Hence, we conclude that an arguably simple margin not studied previously can provide useful insights into observed business cycle patterns.

Keywords: real business cycle models; endogenous growth; propagation mechanism; persistence (search for similar items in EconPapers)
Date: 2007
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Dpto. de Econometría y Estadística, Facultad de CC. Económicas y Empresariales, Universidad del País Vasco, Avda. Lehendakari Aguirre 83, 48015 Bilbao, Spain

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