Elasticities of Substitution in Real Business Cycle Models with Home Production

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Elasticities of Substitution in Real Business Cycle Models with Home Production

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Title: Elasticities of Substitution in Real Business Cycle Models with Home Production
Author: Campbell, John; Ludvigson, Sydney

Note: Order does not necessarily reflect citation order of authors.

Citation: Campbell, John Y., and Sydney Ludvigson. 2001. Elasticities of substitution in real business cycle models with home production. Journal of Money, Credit and Banking 33(4): 847-875.
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Abstract: This paper constructs a simple model of home production that demonstrates the connection between the intertemporal elasticity of substitution in market consumption (IES) and the static elasticity of substitution between home and market consumption (SES). Understanding this connection is important because there is a large body of empirical evidence suggesting that the IES is small, but little evidence on the size of the SES. We use our framework to shed light on the properties of a home production model with a low IES. We find that such a model must have three fundamental properties in order to match key aspects of aggregate U.S. data. First, the steady-state growth rate of technology must be the same across sectors. Second, shocks to technology must be sufficiently positively correlated across sectors. Third, capital must be used more intensively in the market sector than in the home sector. A home production model with these three properties can be surprisingly successful at reconciling the RBC paradigm with evidence for a low IES.
Published Version: http://dx.doi.org/10.2307/2673926
Terms of Use: This article is made available under the terms and conditions applicable to Other Posted Material, as set forth at http://nrs.harvard.edu/urn-3:HUL.InstRepos:dash.current.terms-of-use#LAA
Citable link to this page: http://nrs.harvard.edu/urn-3:HUL.InstRepos:3163262

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  • FAS Scholarly Articles [7219]
    Peer reviewed scholarly articles from the Faculty of Arts and Sciences of Harvard University
 
 

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