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Expected Inflation, Sunspots Equilibria and Persistent Unemployment Fluctuations

Frédéric Dufourt (), Teresa Lloyd-Braga () and Leonor Modesto ()

No 4302, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: We propose and estimate a model where unemployment fluctuations result from self-fulfilling changes in expected inflation (sunspot shocks) affecting nominal wage bargaining. Since the estimated parameters fall near the locus of Hopf bifurcations, country-specific expected inflation shocks can replicate the strong persistence and heterogeneity observed in European unemployment rates. They also generate positive comovements in macroeconomic variables and a large relative volatility of consumption. All these features, hardly accounted for by standard sunspot-driven models, are explained here by the fact that liquidity constrained workers, facing earnings uncertainty in the context of imperfect unemployment insurance, choose to consume their current income.

Keywords: unemployment fluctuations; sunspots equilibria; expected inflation; wage bargaining (search for similar items in EconPapers)
JEL-codes: J60 E32 E37 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2009-07
New Economics Papers: this item is included in nep-cba, nep-lab, nep-mac and nep-mon
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