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Using a two-sector endogenous growth model, this paper explores how productivity shocks in the goods and human capital producing sectors contribute to explaining aggregate cycles in output, consumption, investment and hours. To contextualize the findings, the authors also assess whether the human capital model or the standard Real Business Cycle (RBC) model better explains the observed variation in these aggregates. They find that while neither of the workhorse growth models uniformly dominates the other across all variables and forecast horizons, the two-sector model provides a far better fit to the data.
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