Non-stationary Hours in a DSGE Model

YONGSUNG CHANG, TAEYOUNG DOH, FRANK SCHORFHEIDE
2007 Journal of Money, Credit and Banking  
The time series fit of dynamic stochastic general equilibrium (DSGE) models often suffers from restrictions on the long-run dynamics that are at odds with the data. This paper modifies a stochastic growth model by incorporating permanent labor supply shocks that can generate a unit root in hours worked. Using Bayesian methods we estimate the standard specification in which hours worked are stationary and a modified version with permanent labor supply shocks. If firms can freely adjust labor
more » ... ts, the data support the latter specification. Once we introduce frictions in terms of labor adjustment costs, the overall time series fit improves and the model specification in which labor supply shocks and hours worked are stationary is preferred.
doi:10.1111/j.1538-4616.2007.00070.x fatcat:5pxyhzo6jnamdl4hhv3gx66ffm