Bounded rationality and unemployment dynamics

David Evans, George Evans and Bruce McGough ()

Economics Letters, 2022, vol. 210, issue C

Abstract: Using the bounded rationality implementation developed in Evans et al. (2021), we consider unemployment dynamics driven by aggregate productivity shocks within a McCall-type labor-search model. We find that bounded rationality magnifies the impact effect of a decline in productivity on unemployment. Boundedly rational agents are overly pessimistic about wage offers during the course of a recession, resulting in higher unemployment relative to the rational model.

Keywords: Search and unemployment; Adaptive learning; Bounded rationality; Business cycles (search for similar items in EconPapers)
JEL-codes: D83 D84 E24 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:210:y:2022:i:c:s0165176521004262

DOI: 10.1016/j.econlet.2021.110150

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