Abstract
Recent years, more and more economists show their interests in study of home production. While real business cycle (RBC) theory suggests household capital can only help to produce consumption good in home, Fisher (2007) considers RBC theory with the lead-lag pattern, co-movement and relative volatility of household and business investment and household capital is assumed to be a complementary input with business capital and labor in market production contributes most to this finding. This paper deals with the implications of household capital for monetary policy design. We build a dynamic general equilibrium model with the consideration of Fisher (2007). Our major findings are: (1) when household capital’s share of effective labor is larger, the real effect caused by the exogenous monetary shock is less significant than the time when household capital’s share of effective labor is smaller.(2)Moreover, our model has the same conclusions with Fisher (2007); following a transitory productivity shock in the economic system with household capital’s share of effective labor is larger, since household capital is a complementary input in market production, and it contributes to producing both market and home goods, while business capital produces only market goods, investment in household capital initially falls as business investment rises.(3)Lastly, to stabilize the business cycle, the monetary authority can use the subsidy policy to encourage household raise their investment in household capital. As mentioned above, the larger household capital’s share of effective labor means the less exogenous shock effect.