Okun's law, self-fulfilling fluctuations and automatic stabilizers

Thursday 9 March 2017, 1.00PM to 2.00pm

Speaker(s): Paulo Santos Monteiro

Abstract: We develop and estimate a business cycle model including indivisible labor, endogenous participation and involuntary unemployment. To overcome indivisibilities, optimal allocations involve lotteries over labor force participation and consumption as in Hansen 1985, while shifts in involuntary unemployment are due to search externalities as in Diamond 1982, and obey Okun's Law. It is shown that self-fulfilling fluctuations may emerge across plausible regions of the posterior likelihood, as expectations of high unemployment reduce participation and output which, in turn, validates the high unemployment expectations. Unemployment insurance may help avoid local indeterminacy and, therefore, is a powerful automatic stabilizer.

Location: Economics Staff Room A/EC202

Admission: Staff & PhD Students