An Econometric Study of Hours and Output Variation with Preference Shocks

Abstract

This paper investigates preference shocks, which may be interpreted as deriving from shocks to household production or changes in relative prices, as a mechanism for generating hours variation within a one-sector stochastic optimal growth model without intertemporal substitution or indivisibilities. Maximum likelihood estimates of the preference parameters are presented, along with statistics summarizing simulations of the estimated model. Comparison with post-war U.S. data shows that this model generates sufficient variation in hours relative to productivity, and in consumption relative to output, as well as predicting a negative correlation between hours and productivity.