Report

Consumption heterogeneity, employment dynamics, and macroeconomic co-movement

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;

JEL Classification: E13; E24; E32;

Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Staff Reports

Publication Date: 2013-09-01

Number: 399

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.