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Title: A Rational Inattention Unemployment Trap

Author(s): Martin Ellison and Alistair Macaulay

Publication Date: May 2019

Keyword(s): multiple equilibria, rational inattention and unemployment

Programme Area(s): Monetary Economics and Fluctuations

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.

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Bibliographic Reference

Ellison, M and Macaulay, A. 2019. 'A Rational Inattention Unemployment Trap'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=13761