The Shopping Multiplier

Greg Kaplan

No 853, 2012 Meeting Papers from Society for Economic Dynamics

Abstract: We develop a general equilibrium model in which employed and unemployed households devote a different amount of time to shopping. As in Mortensen and Pissarides (1994), unemployment is caused by the presence of search and matching frictions in the labor market. As in Burdett and Judd (1981), mark-ups in the retail market are endogenous and are determined by the extent of search frictions. The main novelty of our model is to allow for differences in the intensity at which employed and unemployed workers shop in the product market. Differences in the shopping behavior of employed and unemployed households amplify the effect of exogenous shocks on aggregate economic activity, thus generating a positive shopping multiplier. We show that, under some parametric conditions, the shopping multiplier can be strong enough to generate multiple equilibria and, hence, open the door to cyclical fluctuations driven entirely by changes in consumer confidence.

Date: 2012
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