NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Time-Separable Preference and Intertemporal-Substitution Models of Business Cycles

Robert J. Barro, Robert G. King

NBER Working Paper No. 888 (Also Reprint No. r0606)
Issued in May 1982
NBER Program(s):   EFG

Time-separability of utility means that past work and consumption do not influence current and future tastes. This form of preferences does not restrict the size of intertemporal-substitution effects--notably, we can still have a strong response of labor supply to temporary changes in wages. However, there are important constraints on the relative responses of leisure and consumption to changes in relative-price and in permanent income. When the usual aggregation is permissible, time-separability has some important implications for equilibrium theories of the business cycle. Neglecting investment, we, find that changes in perceptions about the future -- which night appear currently as income effects -- have no influence on current equilibrium output. With investment included, no combination of income effects and shifts to the perceived profitability of investment will yield positive co-movements of output, employment, investment and consumption. Therefore, misperceived monetary disturbances or other sources of changed beliefs about the future cannot be used to generate empirically recognizable business cycles. Some richer specifications of intertemporal production opportunities may eventually yield more satisfactory answers. Because of the positive correlation between cyclical movements of consumption and work, equilibrium theories with time-separable preferences inevitably predict a procyclical behavior for the real wage rate, arising from shifts to labor's marginal product. Empirically, we regard the cyclical behavior of real wages as an open question. Aside from analyzing autonomous real shocks to productivity, we suggest that such shifts may occur as firms vary their capital utilization in response to intertemporal relative prices. However, we still lack some parts of a complete theory.

download in pdf format
   (486 K)

email paper

This paper is available as PDF (486 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w0888

Published: Barro, Robert J. and Robert G. King. "Time-Separable Preferences and Intertemporal-Substitution Models of Business Cycles." Quarterly Journal of Economics, Vol. 99, No. 4, (November 1984), pp. 817- 839.

Users who downloaded this paper also downloaded these:
Barro w0490 Intertemporal Substitution and the Business Cycle
Mankiw, Rotemberg, and Summers w0898 Intertemporal Substitution in Macroeconomics
Monacelli and Perotti w14584 Fiscal Policy, Wealth Effects, and Markups
Lorenzoni w12477 A Theory of Demand Shocks
Hall w0720 Intertemporal Substitution in Consumption
 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us