A rational inattention unemployment trap

Martin Ellison and Alistair Macaulay

Journal of Economic Dynamics and Control, 2021, vol. 131, issue C

Abstract: We show that introducing rational inattention into a model with uninsurable unemployment risk can generate multiple steady states, when the model with full information has a unique steady state. The model features persistent, heterogeneous labour market expectations, consistent with survey evidence. In a heterogeneous agent New Keynesian model, rational inattention to the future hiring rate generates three steady states: an unemployment trap with mild deflation and a low (but positive) job hiring rate, a middle steady state with moderate employment and inflation, and an ‘employment trap’ with high employment and inflation. Large mutations in the distribution of household beliefs can shift the economy between steady states.

Keywords: Rational inattention; Unemployment; Multiple steady states (search for similar items in EconPapers)
Date: 2021
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Working Paper: A Rational Inattention Unemployment Trap (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:131:y:2021:i:c:s0165188921001615

DOI: 10.1016/j.jedc.2021.104226

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