Housework and Fiscal Expansions

BY Stefano Gnocchi, Daniela Hauser and Evi Pappa

http://d.repec.org/n?u=RePEc:bca:bocawp:14-34&r=dge

We build an otherwise-standard business cycle model with housework, calibrated consistently with data on time use, in order to discipline consumption-hours complementarity and relate its strength to the size of fiscal multipliers. We show that if substitutability between home and market goods is calibrated on the empirically relevant range, consumption-hours complementarity is large and the model generates fiscal multipliers that agree with the evidence. Hence, our analysis supports the relevance of consumption-hours complementarity for fiscal multipliers. However, we also find that explicitly modeling the home sector is more appealing than restricting to the consumption-leisure margin and/or to the preferences proposed by Greenwood, Hercowitz and Huffman (1988). A housework model can imply substantial complementarity, without low wealth effects contradicting the microeconomic evidence.

It has been fashionable again to look at home production, and it is important. Indeed, it is difficult to understand the labor supply without its outside option. And this paper is a nice example of why it matters.

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