Staff Report 191

An Equilibrium Model of the Business Cycle With Household Production and Fiscal Policy

Ellen R. McGrattan | Consultant
Randall Wright | Consultant
Richard Rogerson

Published May 1, 1995

We estimate a dynamic general equilibrium model of the U.S. economy that includes an explicit household production sector and stochastic fiscal variables. We use our estimates to investigate two issues. First, we analyze how well the model accounts for aggregate fluctuations. We find that household production has a significant impact and reject a nested specification in which changes in the home production technology do not matter for market variables. Second, we study the effects of some simple fiscal policy experiments and show that the model generates different predictions for the effects of tax changes than similar models without home production.

Published In: International Economic Review (Vol 38, Num 2, May 1997, pp. 267-290)

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