Unemployment (fears) and deflationary spirals
Den Haan, Wouter J.
Rendah, Pontus
Riegler, Markus

Date: 2015
Abstract: The interaction of incomplete markets and sticky nominal wages is shown to magnify business cycles even though these two features – in isolation – dampen them. During recessions, fears of unemployment stir up precautionary sentiments which induces agents to save more. The additional savings may be used as investments in both a productive asset (equity) and an unproductive asset (money). But even a small rise in money demand has important consequences. The desire to hold money puts deflationary pressure on the economy, which, provided that nominal wages are sticky, increases wage costs and reduces firm profits. Lower profits repress the desire to save in equity, which increases (the fear of) unemployment, and so on. This is a powerful mechanism which causes the model to behave differently from both its complete markets version, and a version with incomplete markets but without aggregate uncertainty. In contrast to previous results in the literature, agents uniformly prefer non-trivial levels of unemployment insurance.
Abstract: The ADEMU Working Paper Series is being supported by the European Commission Horizon 2020 European Union funding for Research & Innovation, grant agreement No 649396.
Note: Número d'acord de subvenció EC/H2020/649396
Rights: Aquest document està subjecte a una llicència d'ús Creative Commons. Es permet la reproducció total o parcial, la distribució, la comunicació pública de l'obra i la creació d'obres derivades, fins i tot amb finalitats comercials, sempre i quan es reconegui l'autoria de l'obra original. Creative Commons
Language: Anglès.
Series: Barcelona Graduate School of Economics: ADEMU working paper series
Series: Ademu Working Papers Series ; 8
Document: workingPaper
Subject: Keynesian unemployment ; Business cycles ; Search friction ; Magnification ; Propagation ; Heterogeneous agents

Adreça alternativa: https://hdl.handle.net/10230/26782
Adreça alternativa: https://hdl.handle.net/2072/306064

71 p, 849.6 KB

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Research literature > Working papers

 Record created 2018-10-23, last modified 2018-12-17

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