Unemployment, Aggregate Demand, and the Distribution of Liquidity

Russell Wong, Guillaume Rocheteau and Zachary Bethune
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Guillaume Rocheteau: University of California, Irvine
Zachary Bethune: University of Virginia

No 760, 2017 Meeting Papers from Society for Economic Dynamics

Abstract: We develop a New-Monetarist model of unemployment in which distributional considerations matter. Households who lack commitment are subject to both employment and expenditure risk. They self-insure by accumulating real balances and, possibly, claims on firms profits. The distribution of liquidity is endogenous and responds to idiosyncratic risks and monetary policy. Despite the ex-post heterogeneity our model can be solved in closed form in a variety of cases. We show the existence of an aggregate demand channel according to which the distribution of workers across employment states, and their incomes in those states, affects the distribution of liquid wealth and firms' profits. An increase in unemployment benefits or wages has a positive effect on aggregate demand and can lead to higher employment. Moreover, an increase in productivity has a multiplier effect on firms' revenue.

Date: 2017
New Economics Papers: this item is included in nep-dge
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