Equilibrium Unemployment Dynamics

Dale Mortensen

International Economic Review, 1999, vol. 40, issue 4, 889-914

Abstract: The global dynamics of Pissarides' (1990) equilibrium model of aggregate unemployment are studied in the case of increasing returns to scale in production and constant returns to scale in the matching process. An equilibrium is a dynamic path for the aggregate number of matches generated by best-response search and recruiting investment decisions under rational expectations. Necessary and sufficient conditions for multiple equilibria, including limit cycles, are derived, and illustrative examples are computed. The application of saddle-loop bifurcation theory is a novel feature of the analysis. Since one equilibrium Pareto dominates all the others, a macroeconomic coordination problem exists. Copyright 1999 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Date: 1999
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