CONSUMPTION–LEISURE TRADE-OFFS AND PERSISTENCY IN BUSINESS CYCLES

Authors


  • We thank José María Da-Rocha, Antonio Fatás, Ignacio Palacios-Huerta and two anonymous referees for valuable comments and suggestions. Financial support from Ministrio de Ciencia e Innovación and FEDER (ECO2009-07939) and Departamento de Educación, Universidades e Investigación del Gobierno Vasco (IT-223-07 and IT-334-07) is gratefully acknowledged.

Correspondence: Ilaski Barañano, Dept. Fundamentos del Análisis Económico I, UPV-EHU, Lehendakari Agirre Etorbidea 83, 48015 Bilbao, Spain. Tel: +34 946013822; Email: ilaski.baranano@ehu.es.

ABSTRACT

This paper studies whether non-separabilities between consumption and leisure may help to explain the observed persistence in GNP growth. We consider an extended version of Lucas's (1988) human capital investment model that includes labour adjustment costs and compare its performance under different utility specifications with different degrees of complementarity and substitutability between consumption and leisure. We find that when consumption and leisure are complements the model succeeds in matching not only the autocorrelation of output growth but also the important trend-reverting component found in US data. These results hold even if low adjustment costs of labour are considered. Hence, we conclude that an arguably simple margin not considered conventionally can provide useful insights into observed business cycle patterns.

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