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A rational inattention unemployment trap

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  • Ellison, Martin
  • Macaulay, Alistair
Abstract
We show that introducing rational inattention into a model with uninsurable unemployment risk can generate multiple steady states, when the model with full information has a unique steady state. The model features persistent, heterogeneous labour market expectations, consistent with survey evidence. In a heterogeneous agent New Keynesian model, rational inattention to the future hiring rate generates three steady states: an unemployment trap with mild deflation and a low (but positive) job hiring rate, a middle steady state with moderate employment and inflation, and an ‘employment trap’ with high employment and inflation. Large mutations in the distribution of household beliefs can shift the economy between steady states.

Suggested Citation

  • Ellison, Martin & Macaulay, Alistair, 2021. "A rational inattention unemployment trap," Journal of Economic Dynamics and Control, Elsevier, vol. 131(C).
    • Handle: RePEc:eee:dyncon:v:131:y:2021:i:c:s0165188921001615
    DOI: 10.1016/j.jedc.2021.104226
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    Cited by:

    1. Bartosz Maćkowiak & Filip Matějka & Mirko Wiederholt, 2023. "Rational Inattention: A Review," Journal of Economic Literature, American Economic Association, vol. 61(1), pages 226-273, March.
    2. Bartosz Maćkowiak & Mirko Wiederholt, 2021. "Rational Inattention and the Business Cycle Effects of Productivity and News Shocks," SciencePo Working papers Main hal-03878704, HAL.
    3. Yin, Penghui, 2021. "Optimal attention and heterogeneous precautionary saving behavior," Journal of Economic Dynamics and Control, Elsevier, vol. 131(C).

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    More about this item

    Keywords

    Rational inattention; Unemployment; Multiple steady states;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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