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Expected Inflation, Sunspots Equilibria and Persistent Unemployment Fluctuations

Author

Listed:
  • Dufourt, Frédéric

    (BETA-CNRS)

  • Lloyd-Braga, Teresa

    (Católica Lisbon)

  • Modesto, Leonor

    (Universidade Catolica Portuguesa, Lisbon)

Abstract
We propose and estimate a model where unemployment fluctuations result from self-fulfilling changes in expected inflation (sunspot shocks) affecting nominal wage bargaining. Since the estimated parameters fall near the locus of Hopf bifurcations, country-specific expected inflation shocks can replicate the strong persistence and heterogeneity observed in European unemployment rates. They also generate positive comovements in macroeconomic variables and a large relative volatility of consumption. All these features, hardly accounted for by standard sunspot-driven models, are explained here by the fact that liquidity constrained workers, facing earnings uncertainty in the context of imperfect unemployment insurance, choose to consume their current income.

Suggested Citation

  • Dufourt, Frédéric & Lloyd-Braga, Teresa & Modesto, Leonor, 2009. "Expected Inflation, Sunspots Equilibria and Persistent Unemployment Fluctuations," IZA Discussion Papers 4302, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp4302
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    File URL: https://docs.iza.org/dp4302.pdf
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Jean-Michel Grandmont, 2016. "Endogenous Procyclicality of Labor Productivity, Employment, Real Wages and Effort in Conditionally Heteroskedastic Sunspots Unemployment Business Cycles with Negishi-Solow Efficiency Wages," Discussion Paper Series DP2016-14, Research Institute for Economics & Business Administration, Kobe University.
    2. Jean-Michel Grandmont, "undated". "Countercyclical Endogenous Uncertainty Shocks, Efficiency Wages and Procyclical Precautionary Labor Productivity," Working Papers 2017:25, Department of Economics, University of Venice "Ca' Foscari".
    3. Jean-Michel Grandmont, 2016. "Endogenous Procyclicality of Labor Productivity, Employment, Real Wages and Effort in Conditionally Heteroskedastic Sunspots Unemployment Business Cycles with Negishi-Solow Efficiency Wages," Working Papers 2016-06, Center for Research in Economics and Statistics.

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    More about this item

    Keywords

    unemployment fluctuations; sunspots equilibria; expected inflation; wage bargaining;
    All these keywords.

    JEL classification:

    • J60 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - General
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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