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A Rational Inattention Unemployment Trap

Martin Ellison () and Alistair Macaulay

No 13761, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We show that introducing rational inattention into a model with uninsurable unemployment risk can generate multiple steady states, when the same model with full information has a unique steady state. The model features heterogeneity and persistence in household labour market expectations, consistent with survey evidence. In a heterogeneous agent New Keynesian model, we find that rational inattention to the future hiring rate generates a high employment steady state with moderate inflation, and an unemployment trap with very low (but positive) inflation and a low job hiring rate.

Keywords: multiple equilibria; rational inattention; unemployment (search for similar items in EconPapers)
JEL-codes: D83 E10 E24 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-mac and nep-ore
Date: 2019-05
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