Output dynamics in an endogenous growth model

The aim of this paper is to assess the importance of RBC models with endogenous growth in characterizing the observed output dynamics. In particular, this article considers a stochastic version of Lucas' (1988) model in the absence of externalities in discrete time with two modifications: agents do not only derive utility from consumption but also from leisure and labor adjustment costs are included. Results reveal that combining the endogenous character of the engine of growth with labor adjustment costs may help solve the Cogley-Nason (1995) puzzle since, it provides a stronger propagation mechanism and this, in the end, improves the model''s ability to generate realistic output dynamics.