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Federal Reserve Bank of Minneapolis
Staff Report
Non-convexities in quantitative general equilibrium studies of business cycles
Edward C. Prescott
Abstract

This paper reviews the role of micro non-convexities in the study of business cycles. One important non-convexity arises because an individual can work only one workweek length in a given week. The implication of this non-convexity is that the aggregate intertemporal elasticity of labor supply is large and the principal margin of adjustment is in the number employed-not in the hours per person employed-as observed. The paper also reviews a business cycle model with an occasionally binding capacity constraint. This model better mimics business cycle fluctuations than the standard real business cycle model. Aggregation in the presence of micro non-convexities is key in the model.


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Edward C. Prescott, Non-convexities in quantitative general equilibrium studies of business cycles, Federal Reserve Bank of Minneapolis, Staff Report 312, 2003.
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Keywords: Business cycles ; Equilibrium (Economics) ; Econometric models ; Labor supply
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