Homework in Macroeconomics: Household Production and Aggregate Fluctuations

Abstract

This paper explores some macroeconomic implications of including household production in an otherwise standard real business cycle model. We calibrate the model on the basis of macroeconomic evidence and long-run considerations, simulate it, and examine its statistical properties. We find that introducing home production significantly improves the quantitative performance of the standard model along several dimensions. It also implies a very different interpretation of the nature of aggregate fluctuations.