2015 | 41 | 117-130
Article title

RBC Models and the Hours-Wages Puzzle: Puzzle Solved!

Title variants
Languages of publication
This paper shows that a modified real business cycle (RBC) model, one that includes home production and fiscal spending shocks, can solve one of the RBC puzzles and generates zero correlation between wages and hours. In addition, the micro-founded model presented here provides a sound theoretical model to analyze fiscal policy in a neoclassical framework and is able to capture many aspects of the data that the benchmark RBC model was missing
  • CERGE-EI Affiliate Fellow, Department of Economics, American University in Bulgaria
  • Albonico, Alice, Sarantis Kalyvitis and Evi Pappa. 2012. “Revisiting the ‘Productivity-Hours Puzzle’ in the RBC Paradigm: The Role of Investment Adjustment Costs.” Dipartimiento di economia politica e metodi quantitative, Università degli studi di Pavia. RePEc/pav/wpaper/q164.pdf (accessed 10.09.2015).
  • Benhabib, Jess, Richard Rogerson and Randall Wright. 1991. “Homework in macroeconomics: household production and aggregate fluctuations.” Journal of Political Economy 99(6): 1166-1187.
  • Bornukova, Kateryna. 2009. “Real Business Cycles in Two-Person Households with Home Pro- duction.” MPRA Working Paper 25113. https://mpra.ub.uni- (accessed 10.09.2015).
  • Christiano, Lawrence and Martin Eichenbaum. 1992. “Current Real Business Cycle Theories and Aggregate Labor Market Fluctuations,” American Economic Review 82(3):430-450.
  • Gali, Jordi. 1999. “Technology, Employment and the Business Cycle: Do Technology Shocks Explain Aggregate Fluctuations?” American Economic Review 89(1):249-271.
  • Greenwood, Jeremy, Richard Rogerson and Randall Wright. 1995. “Household Production in Real Business Cycle Theory.” In: Frontiers of Business Cycle Research, ed. Thomas F. Cooley, 157-174. Princeton: Princeton University Press.
  • Hansen, Gary. 1985 “Indivisible Labor and the Business Cycle.” Journal of Monetary Economics 16: 309-327.
  • Hansen, Gary and Randall Wright. 1992. “The Labor Market in Real Business Cycle Theory.” Federal Reserve Bank of Minneapolis Quarterly Review 16(2): 2-12.
  • King, Robert, Charles Plosser and Sergio Rebelo. 1988. “Production, Growth and Business Cycles I. The Basic Neoclassical Model.” Journal of Monetary Economics 21: 195-232.
  • King, Robert and Sergio Rebelo. 1999. “Resuscitating real business cycles.” In: Handbook of Macroeconomics, vol. 1B, eds. John Taylor and Michael Woodford, 927-1007. North Holland: Elsevier.
  • Kydland, Finn. 1995. “Business cycles and aggregate labor market fluctuations.” In: Frontiers of Business Cycle Research, ed. Thomas F. Cooley, 126-156. Princeton: Princeton University Press.
  • Kydland, Finn and Edward C. Prescott. 1982. “Time to Build and Aggregate Fluctuations.” Econometrica 50(6): 1345-1370.
  • McGrattan, Ellen, Richard Rogerson and Randall Wright. 1997. “An equilibrium model of the business cycle with household production and fiscal policy.” International Economic Review 38(2), 267-290.
  • Parente, Stephen, Richard Rogerson and Randall Wright. 1999. “Household Production and Development.” Cleveland Fed Economic Review Q3: 21-35.
  • Prescott, Edward C. 1986. “Theory ahead of business cycle measurement.” Quarterly Review, Federal Reserve Bank of Minneapolis, Fall: 9-22.
  • Rogerson, Richard. 1988. “Indivisible Labor, Lotteries and Equilibrium.” Journal of Monetary Economics 21: 3-16.
  • Vasilev, Aleksandar. 2015a. “Aggregation with a mix of indivisible and continuous labor supply decisions: the case of home production.” International Journal of Social Economics, accepted.
  • Vasilev, Aleksandar. 2015b. “US Health and Aggregate Fluctuations.” Bulgarian Economic Papers, St Kliment Ohridski University of Sofia, Faculty of Economics and Business Administration/Center for Economic Theories and Policies, revised Feb 2015.
Document Type
Publication order reference
YADDA identifier
JavaScript is turned off in your web browser. Turn it on to take full advantage of this site, then refresh the page.