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 simulation of the estimated model. Comparison with postwar 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. Copyright 1992 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

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