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Shopping Externalities and Self-Fulfilling Unemployment Fluctuations

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  • Greg Kaplan
  • Guido Menzio

Abstract

We propose a novel theory of self-fulfilling unemployment fluctuations. According to this theory, a firm hiring an additional worker creates positive external effects on other firms, as a worker has more income to spend and less time to search for low prices when he is employed than when he is unemployed. In response to the increase in demand and prices, other firms enter or increase their presence in the product market by hiring additional workers. We quantify the external effects of employment on demand and prices and show that they are sufficiently strong to generate multiple rational expectations equilibria and, hence, self-fulfilling economic fluctuations.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18777.

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Date of creation: Feb 2013
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Handle: RePEc:nbr:nberwo:18777

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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. The unemployed should shop less for bargains, and they would not be unemployed
    by Economic Logician in Economic Logic on 2013-01-28 15:20:00
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
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Cited by:
  1. Greg Kaplan & Guido Menzio, 2013. "The Research Agenda: Greg Kaplan and Guido Menzio on the Macroeconomics of Bargain Hunting," EconomicDynamics Newsletter, Review of Economic Dynamics, vol. 14(2), November.
  2. Zhen Huo & Jose-Victor Rios-Rull, 2013. "Paradox of thrift recessions," Staff Report 490, Federal Reserve Bank of Minneapolis.
  3. Pascal Michaillat & Emmanuel Saez, 2014. "Aggregate Demand, Idle Time, and Unemployment," Discussion Papers 1419, Centre for Macroeconomics (CFM).
  4. Emmanuel Saez & Pascal Michaillat, 2013. "A Theory of Aggregate Supply and Aggregate Demand as Functions of Market Tightness with Prices as Parameters," 2013 Meeting Papers 1216, Society for Economic Dynamics.
  5. Pascal Michaillat & Emmanuel Saez, 2013. "A Model of Aggregate Demand and Unemployment," CEP Discussion Papers dp1235, Centre for Economic Performance, LSE.
  6. Greg Kaplan & Guido Menzio, 2014. "The Morphology of Price Dispersion," NBER Working Papers 19877, National Bureau of Economic Research, Inc.
  7. Alberto Cavallo & Brent Neiman & Roberto Rigobon, 2014. "The Price Impact of Joining a Currency Union: Evidence from Latvia," NBER Working Papers 20225, National Bureau of Economic Research, Inc.
  8. Martin Gervais & Nir Jaimovich & Henry E. Siu & Yaniv Yedid-Levi, 2013. "Technological Learning and Labor Market Dynamics," NBER Working Papers 19767, National Bureau of Economic Research, Inc.
  9. Sniekers, F.J.T., 2013. "Endogenous Beveridge cycles and the volatility of unemployment," CeNDEF Working Papers 13-12, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
  10. Bonilla, Roberto & Kiraly, Francis, 2013. "Marriage wage premium in a search equilibrium," Labour Economics, Elsevier, vol. 24(C), pages 107-115.

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