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MACROECONOMICS
Yet another weakness of the real business cycle approach is that it requires
agents to willingly reallocate leisure (and labour) over time. Agents apprecia-
bly reduce the quantity of labour they supply in response to a reduction in the
real wage or in response to a decrease in the real interest rate. Real business
cycle theorists require labour to be exceedingly intertemporally substitutable.
Individuals facing an increase in the real wage today relative to future real
wages should work a lot today and a little in the future.
Yet, studies of individual labour supply over time have not been able to
find that individuals ...
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