WORKING PAPER NO. 06-3 - NON-STATIONARY HOURS IN A DSGE MODEL - Abstract

Sep 18, 2026

The paper studies time-series properties of dynamic stochastic general equilibrium (DSGE) models, focusing on restrictions from long-run dynamics that conflict with observed data. It relaxes these restrictions by modifying a stochastic growth model to include permanent labor supply shocks, allowing hours worked to follow a unit root. Bayesian estimation compares a standard stationary-hours specification against the modified non-stationary-hours version, and the results support the latter.

LanguageEnglish

CategoryResearch & Report

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Pages19

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Abstract

1 Introduction

WORKING PAPER NO. 06-3 NON-STATIONARY HOURS IN A DSGE MODEL Yongsung Chang Seoul National University Taeyoung Doh University of Pennsylvania Frank Schorfheide University of Pennsylvania, CEPR, and Visiting Scholar, Federal Reserve Bank of Philadelphia January 12, 2006 Non-stationary Hours in a DSGE Model Yongsung Chang Seoul National University Taeyoung Doh University of Pennsylvania Frank Schorfheide¤ University of Pennsylvania CEPR January 12, 2006 Abstract The time series ¯t of dynamic stochastic general equilibrium (DSGE) models often su®ers from restrictions on the long-run dynamics that are at odds with the data. Relaxing these restrictions can close the gap between DSGE models and vector autoregressions. This paper modi¯es a simple stochastic growth model by incorporating permanent labor supply shocks that can generate a unit root in hours worked. Using Bayesian methods we estimate two versions of the DSGE model: the standard speci¯cation in which hours worked are stationary and the modi¯ed version with permanent labor supply shocks. We ¯nd that the data support the latter speci¯cation. JEL CLASSIFICATION: C32, E52, F41 KEY WORDS: Bayesian Econometrics, DSGE Models, Non-stationary Hours ¤ Yongsung Chang: School of Economics, Shillim-Dong, Kwanak-Gu, Seoul, Korea 151-742; email: [Yohg@snu.ac.kr](Yohg@snu.ac.kr). Taeyoung Doh and Frank Schorfheide: Department of Economics, McNeil Building, 3718 Locust Walk, Philadelphia, PA 19104-6297; email: [doht@ssc.upenn.edu](doht@ssc.upenn.edu) and [schorf@ssc.upenn.edu](schorf@ssc.upenn.edu. We)[. We](schorf@ssc.upenn.edu. We) are thankful to Martin Eichenbaum and Robert Vigfusson, who kindly provided their data. Chang gratefully acknowledges the Research Grant of the School of Economics at Seoul National University. Schorfheide gratefully acknowledges ¯nancial support from the Alfred P. Sloan Foundation. GAUSS programs that implement the empirical analysis will be available at [www.econ.upenn.edu/](www.econ.upenn.edu/) ~schorf. The views expressed here are those of the authors and not necessarily re°ect the views of the Federal Reserve Bank of Philadelphia or the Federal Reserve System. This paper is available free of charge at [www.philadelphiafed.org/econ/wps/index.html](www.philadelphiafed.org/econ/wps/index.html). 1 1 Introduction Dynamic stochastic general equilibrium (DSGE) models have become a workhorse for studying various aggregate economic phenomena. Since these models generate both business cycle °uctuations as well as long-run growth paths, they should ultimately be able to match data across all frequencies. Despite the signi¯cant progress in developing empirically viable models, e.g., Christiano, Eichenbaum, and Evans (2005) and Smets and Wouters (2003), the time series ¯t of DSGE models is typically inferior to the ¯t of vector autoregressions (VAR) that are estimated with well-calibrated shrinkage methods, as documented in Del Negro, Schorfheide, Smets, and Wouters (2004) . One reason for the poor time series ¯t is the restrictions imposed by the so-called balanced growth path. Along the balanced growth path, (i) the \big ratios" (investment-output, consumption-output, capital-output, and real wage-output) are stable as output, consumption, investment, capital stock, and real wages grow at the same rate, and (ii) the real rates of return to capital and per capita hours worked are stationary.1 As pointed out, for instance, by Canova, Finn, and Pagan (1994), these model-implied co-trending relationships are often rejected by the data. Modi¯cations to the probabilistic structure of the exogenous shocks that generate °uctuationsin DSGE models can be used to generalize trend structures. For instance, in a two-sector model Edge, Laubach, and Williams (2003) introduce trends in sector-speci¯c productivity processes such that the relative price of investment becomes non-stationary and real investment and consumption can grow at di®erent

FAQs

What problem do DSGE models face in matching data over the long run?

Their time series often suffer from long-run dynamic restrictions that are inconsistent with the data.

How does the paper modify the DSGE framework to address hours worked dynamics?

It incorporates permanent labor supply shocks into a stochastic growth model so that hours worked can generate a unit root.

What do the Bayesian estimates conclude about the preferred specification?

The data support the modified specification with permanent labor supply shocks rather than the standard stationary-hours model.

Sep 18, 2026

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