The Household Sector in the Smets-wouters Dsge Model: Comparisons with the Standard Optimal Growth Model

In [1], households are assumed to supply labor inelastically in each time period t, so there is no labor/leisure “choice”; the only argument of the household utility function at each time point t is amounts of a single produced consumption good (or a scalar index for “real” consumption). In contrast, in [2] the household utility function has two arguments in each time period t: (i) (produced) goods; and (ii) leisure. Moreover, labor is differentiated over households so that there is some monopoly power over wages.