Reconciling Jaimovich-Rebello Preferences, Habit in Consumption and Labor Supply

This note studies a form of a utility function of consumption with habit and leisure that (a) is compatible with long-run balanced growth, (b) hits a steady state observed target for hours worked and (c) is consistent with micro-econometric ev- idence for the inter-temporal elasticity of substitution and the Frisch elasticity of labor supply. Employing Jaimovich-Rebello preferences our results highlight a con- straint on the preference parameter needed to target the steady-state Frisch elastic- ity. This leads to a lower bound for the latter that cannot be reconciled empirically with external habit, but the introduction of a labor wedge solves the problem. We also propose a dynamic Frisch inverse elasticity measure and examine its business cycle properties