Recent literature has shown that productivity-driven business cycles are beneficial to consumers in the context of market clearing real business cycle model. In this paper, we argue that this notion of welfare-improving business cycles does not jointly satisfy (1) the balanced growth path property and (2) micro evidence on the Frisch labor supply elasticity. We then show that once “variable effort,” a channel that plays an important role in the business cycle frequency but has been ignored by the previous literature on the welfare cost of business cycles, is introduced into the model, welfare-improving business cycles can be achieved in relatively plausible parameter regions.
Bibliographical noteFunding Information:
Names of authors are alphabetically ordered and each author contributes equally to this paper. We would like to thank an anonymous referee and the associate editor (Eric Young) for their valuable comments. Shim acknowledges the financial support from Yonsei University ( Yonsei University Future-leading Research Initiative ( 2020-22-0088 )). Hye Rim Yi provided excellent research assistance.
© 2020 Elsevier B.V.
All Science Journal Classification (ASJC) codes
- Economics and Econometrics