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The Intertemporal Substitution Model of Labor Supply in an Open Economy

João Ricardo Faria
University of Texas at Dallas - Department of Economics & Finance

Miguel A. Leon-Ledesma
University of Kent, Canterbury - Department of Economics


October 2000

Kent Economics Discussion Paper No. 00/09

Abstract:     
The intertemporal substitution model of labor supply has been based on closed economy models. This paper studies the intertemporal substitution hypothesis in an open economy. It derives the long run labor supply as a function of the real wage, real interest rate and real exchange rate from a standard open economy optimizing representative agent model. The paper tests the steady state solution of the model for the US and, in order to avoid the Lucas critique, it tests for the superexogeneity of the interest rate and exchange rate. In accordance with the theory, the empirical evidence is supportive of the intertemporal substitution hypothesis, the significant impact of the real exchange rate, and is robust to the Lucas critique.

Keywords: Intertemporal substitution, Labor supply, Interest rate, Exchange rate

JEL Classifications: D90, J22, E32

Working Paper Series

Date posted: January 15, 2001 ; Last revised: June 28, 2001

Suggested Citation

Faria, João Ricardo and Leon-Ledesma, Miguel A., The Intertemporal Substitution Model of Labor Supply in an Open Economy (October 2000). Kent Economics Discussion Paper No. 00/09. Available at SSRN: http://ssrn.com/abstract=252428 or doi:10.2139/ssrn.252428


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Contact Information

Miguel Leon-Ledesma (Contact Author)
University of Kent, Canterbury - Department of Economics ( email )
Keynes College
Kent CT2 7NP
United Kingdom
00 44 0 1227 823026 (Phone)
00 44 0 1227 827850 (Fax)
HOME PAGE: http://www.ukc.ac.uk/economics/mal/
João Ricardo Faria
University of Texas at Dallas - Department of Economics & Finance ( email )
P.O. Box 830688, GR31
Richardson, TX 75083
United States
972-883-6402 (Phone)
972-883-6297 (Fax)
HOME PAGE: http://www.geocities.com/fariajocka/Index.html
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