Reconciling Jaimovich–Rebello preferences, habit in consumption and labor supply

Year
2018
Type(s)
Author(s)
Tom Holden, Paul Levine, Jonathan Swarbrick
Source
Economics Letters, 168: 132-137, 2018
Url(s)
https://doi.org/10.1016/j.econlet.2018.04.013
https://ideas.repec.org/p/bca/bocawp/18-26.html
BibTeX
Abstract BibTeX

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.