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.