describe the production function of firms. These parameters can be identified from mi- croeconomic studies. In our very simple model, if is close to 1, the intertemporal substitution of leisure will be very strong and the propagation mechanism in equation ( 11 ) will translate relatively small technology shocks into much larger output Empirically, the long-run supply of labor is slightly backward-bending. In the long run, higher wages reduce labor supply somewhat as people prefer to spend some of their higher income on increased leisure. Suppose one works 2,000 out of 8,760 24 365 hours.
shocks. In contrast, if the intertemporal substitution of leisure is weak, this propagation mechanism will be relatively unimportant. The empirical evidence, based on microeco-nomic data, favors the view that intertemporal substitution is relatively weak. RECAP • Real business cycle theory models the macroeconomy through the optimizing deci- sions about work and consumption made by individuals and the optimizing decisions about production made by firms. The model presented above is a simple version of the dynamic models deployed by RBC theorists. • Real business cycle theory minimizes the role of nominal fluctuations and money. • RBC theorists try to identify deep parameters that can be measured in microeco- nomic studies. The elasticity of the intertemporal substitution of leisure is a key ex- ample. The conclusions from the measurement of such parameters are not always favorable to the RBC models.
- Summer '18
- Sagar Arora