Analysis of real business cycle models with capital-skill complementarity

Abstract

The aim of this paper is to analyze the effects of a production function with capital-skill complementarity, as opposed to the standard Cobb-Douglas production function, on Real Business Cycle [RBC] models. Capital-skill complementarity is mostly used in open economy models to study the wage inequality but this production function has not been employed in closed economy real business cycle models. This paper shows that the production function with capital-skill complementarity causes even lower endogenous propagation of the impulse response functions than those of standard closed economy RBC models, which already have problems with regards to the persistence of output.