Consumption heterogeneity, employment dynamics, and macroeconomic co-movement

Stefano Eusepi and Bruce Preston

No 399, Staff Reports from Federal Reserve Bank of New York

Abstract: Real-business-cycle models necessarily rely on total factor productivity shocks to explain the observed co-movement between 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 nonemployed can generate co-movement in response to fluctuations in the marginal efficiency of investment. Estimation reveals that these shocks explain the bulk of business-cycle variance in consumption, investment, and hours. A corollary of the model's empirical success is that the labor wedge is not important at business-cycle frequencies.

Keywords: business cycles; investment shocks; heterogeneity; labor market dynamics (search for similar items in EconPapers)
JEL-codes: E13 E24 E32 (search for similar items in EconPapers)
Date: 2009
New Economics Papers: this item is included in nep-bec and nep-dge
Note: Previous title: “Labor Supply Heterogeneity and Macroeconomic Comovement” For a published version of this report, see Stefano Eusepi and Bruce Preston, "Consumption Heterogeneity, Employment Dynamics, and Macroeconomic Co-movement," Journal of Monetary Economics 71 (April 2015): 13-32.
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Journal Article: Consumption heterogeneity, employment dynamics and macroeconomic co-movement (2015)
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