A Human Capital Explanation of Real Business Cycles*

The intangible capital approach explains procyclical labor but does not present the typical RBC "second moments" that show the correlation and volatilities of the variables with output in the simulated model as compared to the actual business cycle filtered data. [...] We do include all of these moments and we show that the model performs exceedingly well in explaining the puzzles of labor comovement while capturing the traditional comovement of consumption and physical capital investment that the one-sector model achieves. [...] However, since it is a shock to human capital investment, which in turn determines the endogenous growth rate of the economy, this added productivity shock causes an increase in the level of human capital and in the permanent income of the consumer. [...] We also show by extension, and for the first time, that the model explains the RBC second moments of the main component shares of both the GDP and the GDI sides of the NIPA data. [...] SUERF Secretariat c/o OeNB SUERF’s events and publications The views expressed are those of the Otto-Wagner-Platz 3 provide a unique European author(s) and not necessarily those of A-1090 Vienna, Austria network for the analysis and the institution(s) the author(s) is/are Phone: +43-1-40420-7206 discussion of these and related issues.