Reconciling Jaimovich-Rebelo preferences, habit in consumption and labor supply

Tom Holden, Paul Levine, Jonathan Swarbrick

    Research output: Contribution to journalArticlepeer-review

    1 Citation (Scopus)

    Abstract

    This note studies a form of a utility function of consumption with habit and leisure that (a) is compatible with long-run balanced growth, (b) hits a steady state observed target for hours worked and (c) is consistent with micro-econometric evidence for the inter-temporal elasticity of substitution and the Frisch elasticity of labor supply. Employing Jaimovich–Rebello preferences our results highlight a constraint on the preference parameter needed to target the steady-state Frisch elasticity. This leads to a lower bound for the latter that cannot be reconciled empirically with external habit, but the introduction of a labor wedge solves the problem. We also propose a dynamic Frisch inverse elasticity measure and examine its business cycle properties.
    Original languageEnglish
    Number of pages6
    JournalEconomics Letters
    Volume168
    Early online date25 Apr 2018
    DOIs
    Publication statusPublished - Jul 2018

    Keywords

    • Jaimovich–Rebello preferences
    • Habits in consumption
    • Labor supply
    • Dynamic Frisch elasticity
    • Labor wedge

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