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Flexible Labour, Income Effects, and Asset Prices
TL;DR: In this paper, the authors used Jaimovich-Rebel preferences with internal habits in consumption and showed that asset prices are superior when the first channel is strong and the second channel is weak.
Abstract: This paper studies how i¬‚exible labour decisions ai¬€ect asset pricing in a Real Business Cycle model. It uses Jaimovich-Rebelo preferences with internal habits in consumption and distinguishes between two income effect channels (i) the ‘habit income ei¬€ect’ channel and (ii) the ‘separability income ei¬€ect’ channel. I i¬ nd that asset prices are superior when the i¬ rst channel is strong and the second is weak, this is the case of using GHH preferences with internal habits in consumption.
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04 Jul 2013
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TL;DR: In this article, the authors adopt the Keynesian view that direct shocks to investment are important for business fluctuations, but incorporate them in a neo-classical framework where the rate of capital expenditure is fixed.
Abstract: The present paper adopts the Keynesian view that direct shocks to investment are important for business fluctuations, but incorporates them in a neo-classical framework where the rate of capital ut ...
2,208 citations
"Flexible Labour, Income Effects, a..." refers background or methods in this paper
...JR preferences nest as polar cases the GHH specification of Greenwood et al. (1988), and the KPR specification of King et al....
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...JR preferences nest as polar cases the GHH specification of Greenwood et al. (1988), and the KPR specification of King et al. (1988), both of which have standard in macroeconomic models. This class of preferences has been used extensively in the literature on news effects on business cycles (e.g. Jaimovich and Rebelo (2009) and Schmitt-Groh and Uribe (2012)) however it’s use in the macroeconomic asset pricing literature seems appears missing....
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...JR preferences nest as polar cases the GHH specification of Greenwood et al. (1988), and the KPR specification of King et al. (1988), both of which have standard in macroeconomic models....
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TL;DR: In this article, the authors estimate conditional correlations of employment and productivity, based on a decomposition of the two series into technology and non-technology components, and show that the pattern of economic fluctuations attributed to technology shocks seems to be largely unrelated to major postwar cyclical episodes.
Abstract: Using data for the G7 countries, I estimate conditional correlations of employment and productivity, based on a decomposition of the two series into technology and non-technology components. The picture that emerges is hard to reconcile with the predictions of the standard Real Business Cycle model. For a majority of countries the following results stand out: (a) technology shocks appear to induce a negative comovement between productivity and employment, counterbalanced by a positive comovement generated by demand shocks, (b) the impulse responses show a persistent decline of employment in response to a positive technology shock, and (c) measured productivity increases temporarily in response to a positive demand shock. More generally, the pattern of economic fluctuations attributed to technology shocks seems to be largely unrelated to major postwar cyclical episodes. A simple model with monopolistic competition, sticky prices, and variable effort is shown to be able to account for the empirical findings.
1,463 citations
TL;DR: In this paper, two modifications are introduced into the standard real-business-cycle model: habit preferences and a two-sector technology with limited inter-sectoral factor mobility, which is consistent with the observed mean risk-free rate, equity premium, and Sharpe ratio on equity.
Abstract: Two modifications are introduced into the standard real-business-cycle model: habit preferences and a two-sector technology with limited intersectoral factor mobility. The model is consistent with the observed mean risk-free rate, equity premium, and Sharpe ratio on equity. In addition, its business-cycle implications represent a substantial improvement over the standard model. It accounts for persistence in output, comovement of employment across different sectors over the business cycle, the evidence of "excess sensitivity" of consumption growth to output growth, and the "inverted leading-indicator property of interest rates," that interest rates are negatively correlated with future output.
1,108 citations
TL;DR: In this article, a model with habit formation preferences and capital adjustment costs was proposed to explain the historical equity premium and the average risk-free return while replicating the salient business cycle properties.
1,049 citations
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TL;DR: This article proposed a model that generates an economic expansion in response to good news about future total factor productivity (TFP) or investment-specific technical change, without relying on negative productivity shocks.
Abstract: We propose a model that generates an economic expansion in response to good news about future total factor productivity (TFP) or investment-specific technical change. The model has three key elements: variable capital utilization, adjustment costs to investment, and preferences that exhibit a weak short-run wealth effect on the labour supply. These preferences nest the two classes of utility functions most widely used in the business cycle literature as special cases. Our model can generate recessions that resemble those of the post-war U.S. economy without relying on negative productivity shocks. The recessions are caused not by contemporaneous negative shocks but rather by lackluster news about future TFP or investment-specific technical change.
798 citations