Labor Hoarding, Superior Information and Business Cycle Dynamics

Abstract

In this paper, we test whether labor-hoarding environments with basic and augmented laws of motion provide an adequate explanation for observed business cycle dynamics. The basic law of motion assumes that the information set used by economic agents to forecast future forcing variables includes only the history of forcing variables. Augmented laws of motion assume that the information set is superior and include both forcing and hidden exogenous variables. We show that the labor-hoarding environment with the basic law of motion fails to replicate observed business cycle facts, while the environment with augmented laws of motion successfully matches these facts.hidden variable, law of motion, trend-cycle decomposition