The Intertemporal Substitution Model of Labor Supply in an Open Economy

João Ricardo Faria and Miguel Leon-Ledesma

Studies in Economics from School of Economics, University of Kent

Abstract: The intertemporal substitution model of labor supply has been based on closed economy models. This paper studies the intertemporal substitution hypothesis in an open economy. It derives the long run labor supply as a function of the real wage, real interest rate and real exchange rate from a standard open economy optimizing representative agent model. The paper tests the steady state solution of the model for the US and, in order to avoid the Lucas critique, it tests for the superexogeneity of the interest rate and exchange rate. In accordance with the theory, the empirical evidence is supportive of the intertemporal substitution hypothesis, the significant impact of the real exchange rate, and is robust to the Lucas critique.

Keywords: Intertemporal substitution; Labor supply; Interest rate; Exchange rate (search for similar items in EconPapers)
JEL-codes: D90 E32 J22 (search for similar items in EconPapers)
Date: 2000-10
New Economics Papers: this item is included in nep-lab
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Citations: View citations in EconPapers (4)

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