DP13761 A Rational Inattention Unemployment Trap

Author(s): Martin Ellison, Alistair Macaulay
Publication Date: May 2019
Keyword(s): multiple equilibria, rational inattention, unemployment
JEL(s): D83, E10, E24
Programme Areas: Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13761

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.