Expected inflation, sunspots equilibria and persistent unemployment fluctuations

Arbeitspapier

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.

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• Language: Englisch

References and Relationships

• Bibliographic citation: Series: IZA Discussion Papers ; No. 4302

Classification and Topics

• Classification: Wirtschaft ; Mobility, Unemployment, Vacancies, and Immigrant Workers: General ; Business Fluctuations; Cycles ; Prices, Business Fluctuations, and Cycles: Forecasting and Simulation: Models and Applications
• Subject: Unemployment fluctuations ; sunspots equilibria ; expected inflation ; wage bargaining ; Arbeitslosigkeit ; Volatilität ; Hysteresis ; Inflationserwartung ; Sunspot ; Lohnverhandlungen ; Theorie ; Schätzung ; EU-Staaten

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Dufourt, Frédéric ; Lloyd-Braga, Teresa ; Modesto, Leonor
• Event: Veröffentlichung
• (who): Institute for the Study of Labor (IZA)
• (where): Bonn
• (when): 2009

Further information

• Handle: http://hdl.handle.net/10419/35911
• URN: urn:nbn:de:101:1-20090825106