Output dynamics in an endogenous growth model

Abstract

The aim of this paper is to analyze whether endogenous growth RBC models are consistent with two stylized facts about U.S. output dynamics. First, GNP growth is positively correlated in the short run and it has a weak negative autocorrelation over longer horizons. Second, GNP appears to have an important trend-reverting component that has a hump-shaped MA representation. In particular, this article considers a stochastic version of Lucas' (1988) model in the absence of externalities in discrete time with two modifications: agents derive utility not only from consumption but also from leisure and labor adjustment costs are included. Results reveal that combining the endogenous character of the engine of growth with labor adjustment costs may help solve the Cogley-Nason (1995) puzzle since it provides a stronger propagation mechanism which, in turn, improves the model's ability to generate realistic output dynamics.