Working Paper: CEPR ID: DP13761
Authors: Martin Ellison; Alistair Macaulay
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.
Keywords: multiple equilibria; rational inattention; unemployment
JEL Codes: D83; E10; E24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| rational inattention (D80) | household labor market expectations (D13) |
| household labor market expectations (D13) | precautionary savings behavior (D14) |
| precautionary savings behavior (D14) | employment and inflation rates (E24) |