TY  - JOUR
AU  - Campbell,John Y.
AU  - Ludvigson,Sydney
TI  - Elasticities of Substitution in Real Business Cycle Models with Home    Production
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 6763
PY  - 1998
Y2  - October 1998
UR  - http://www.nber.org/papers/w6763
L1  - http://www.nber.org/papers/w6763.pdf
N1  - Author contact info:
John Y. Campbell
Morton L. and Carole S.
Olshan Professor of Economics
Department of Economics
Harvard University
Littauer Center 213
Cambridge, MA 02138
Tel: 617/496-6448
Fax: 617/495-7730
E-Mail: john_campbell@harvard.edu

Sydney C. Ludvigson
Department of Economics
New York University
19 W. 4th Street, 6th Floor
New York, NY  10002
Tel: 212/998-8927
Fax: 212/995-4186
E-Mail: sydney.ludvigson@nyu.edu
AB  - This paper constructs a simple model of home production that demonstrates the connection between the intertemporal elasticity of substitution in market consumption (IES) and the static elasticity of substitution between home and market consumption (SES), when the utility function is additively separable over home and market consumption.   Understanding this connection is important because there is a large body of empirical evidence suggesting that the IES is small, but little evidence on the size of the SES.  We use our framework to shed light on the properties of a home production model with a low IES.  We find that such a model must have two fundamental properties in order to match key aspects of the U.S. aggregate data.  First, the steady-state growth rate of technology must be the same across sectors. Second, shocks to technology must be sufficiently positively correlated across sectors.
ER  -