Non-Separability, Heterogeneous Labor Supply, Investment, and the Business Cycle

Pablo Guerron

No 5, Working Paper Series from North Carolina State University, Department of Economics

Abstract: I study the effects of a monetary shock in an economy characterized by heterogenous labor schedules and non-separability between consumption and labor in the utility function. To that end, I develop a simple method to deal with household heterogeneity arising from wealth differentials. Compared to competing models in the literature, the estimated version of my model fits better the responses of output, consumption, and wages after a monetary shock. Notably, my model requires no adjustment cost in investment, and smaller degrees of habit formation preference for consumption, and wage stickiness than other standard models. Furthermore, I show that non-separability is an important source of amplification of the effects of a monetary shock on output and investment.

Keywords: Heterogeneous Choices; Impulse Responses; Monetary Policy (search for similar items in EconPapers)
JEL-codes: E3 E4 E5 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2006-05, Revised 2006-08
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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