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
Kent Economics Discussion Paper No. 00/09
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.
Number of Pages in PDF File: 16
Keywords: Intertemporal substitution, Labor supply, Interest rate, Exchange rate
JEL Classification: D90, J22, E32working papers series
Date posted: January 15, 2001
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