Authors: Kwang Hwan Kim(Yonsei University), Chang-kee Lee(BOK)
This paper seeks to resolve the consumption comovement problem in DSGE models: Consumption falls after a positive marginal efficiency of investment (MEI) shock, whereas other major economic variables such as GDP, investment, and labor rise. We perform a Bayesian estimation of the standard medium-scale DSGE model augmented with Jaimovich and Rebelo (2009) utility function and habit formation using U.S. and Korean data. We find that nonseparability between consumption and labor in the utility function is an essential element to resolve the comovement problem in both U.S. and Korean economy. The strength of habit formation in turn affects the ability of different specifications of introducing variable capital utilization to resolve the comovement problem. Finally, MEI shock is a most important driver of Korean business cycles as it is in U.S. economy.