Real Business Cycle under consumption and leisure preferences in Iran: Dynamic Stochastic General Equilibrium Approach

In real business cycle models، the concept of habit formation، which can explain phenomena such as the equity premium puzzle، is mostly restricted to the consumption part of the utility function of the representative household. At least، a detailed analysis of the dynamics of a model with habit formation in both consumption and leisure does not yet exist in Iran studies. In this study، by making adjustments in real business cycle model، a dynamic stochastic general equilibrium model (DSGE) is designed for Iran in which one can show the business cycle characteristics of Iranian economy. Findings in this research show that leisure and consumption habits parameters in the model can change consumption، leisure and production more than before. The results indicate that if the leisure habit parameter is considered in the utility function، it can reduce production further.