Refinements on macroeconomic modeling: The role of non-separability and heterogeneous labor supply

This paper proposes a dynamic stochastic general equilibrium model characterized by heterogenous labor schedules and non-separability between consumption and labor in the utility function. The model successfully describes output, consumption, investment, and interest rates after a monetary expansion. The proposed formulation improves on standard models by using preferences favored by the data and by requiring investment adjustment costs and habit formation parameters more in line with the micro-based evidence. (C) 2008 Elsevier B.V. All rights reserved.