Consumption Heterogeneity, Employment Dynamics, and Macroeconomic Co-movement
Previous title: “Labor Supply Heterogeneity and Macroeconomic Comovement”
Revised: September 2013
JEL classification: E13, E24, E32
Stefano Eusepi and
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.
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.