Three essays on human capital and business cycles

• Main Author: Dang, Jing
• Published: Cardiff University 2010
• Subjects: 658.3
• Online Access: http://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.584883

This thesis contains four independent chapters with all of them emphasizing the role of purposeful human capital accumulation in affecting short-run economic dynamics. Four chapters jointly are aimed to deliver two key messages: first, human capital investment is an important channel to propagate business cycle shocks second, accounting for human capital investment decision appropriately solves two consumption puzzles ("excess sensitivity" and "excess smoothness") simultaneously. The tool used to achieve these goals is an extended version of the Uzawa-Lucas two-sector endogenous growth model. Specifically, the first chapter shows that modelling human capital formation explicitly in a business cycle framework gives rise to a strong internal propagation mechanism such that output growth is positively autocorrelated in short horizons and output has a hump-shaped impulse response. The second chapter shows that if human capital investment is counted as part of measured output (not the case in the chapter 1), the endogenous growth model in this thesis is also able to replicate the observed output dynamics via a different mechanism. The third chapter shows that taking into account people's human capital investment decision is able to reconcile the "excess sensitivity" of consumption with permanent income hypothesis. The last chapter shows that a reasonable degree of elasticity of intertemporal substitution is able to explain consumption smoothness when income process is nonstationary.