Lower-Frequency Macroeconomic Fluctuations strongLiving Standardsstrong.pdf

Lower-Frequency Macroeconomic Fluctuations: Living Standards and Leisure Benjamin A. Malin Stanford University January 16, 2006 Abstract Although it is well known that aggregate variables have slow-moving stochastic com- ponents, research on macroeconomic áuctuations has focused primarily on high-frequency movements of the data. I document some interesting lower-frequency facts in U.S. post- war data and investigate whether dynamic stochastic general equilibrium (DSGE) models can explain these facts. One fact of particular interest is that hours worked per capita is negatively correlated with both output per capita and total factor productivity (TFP) at lower frequencies, in stark contrast to the positive comovement of these three variables at high frequencies. I show that this lower-frequency fact is puzzling for many DSGE models and explore a variety of candidate solutions to this puzzle. I demonstrate that prefer- ences which depend on a time-varying reference level of consumption (living standards) can rationalize the observed patterns. Finally, I discuss the relative merits of the living standards interpretation of the model to alternative interpretations. 1 Introduction Research on macroeconomic áuctuations has focused primarily on high-frequency movements of aggregate variables. As noted by King and Rebelo (1999), a fairly conventional deÖnition of the business cycle is áuctuations in economic time series that have a periodicity of eight years or less. This deÖnition has a strong intellectual tradition, following Burns and Mitchell (1946) and Prescott (1986), and