Report

Non-convexities in quantitative general equilibrium studies of business cycles

Abstract: This paper reviews the role of micro non-convexities in the study of business cycles. One important non-convexity arises because an individual can work only one workweek length in a given week. The implication of this non-convexity is that the aggregate intertemporal elasticity of labor supply is large and the principal margin of adjustment is in the number employed-not in the hours per person employed-as observed. The paper also reviews a business cycle model with an occasionally binding capacity constraint. This model better mimics business cycle fluctuations than the standard real business cycle model. Aggregation in the presence of micro non-convexities is key in the model.

Keywords: Labor supply; Econometric models; Equilibrium (Economics); Business cycles;

Bibliographic Information

Provider: Federal Reserve Bank of Minneapolis

Part of Series: Staff Report

Publication Date: 2003

Number: 312