Equilibrium Unemployment Cycles
The global dynamics of an equilibrium model of aggregate unemployment that focuses on the job/worker matching process is studied for the case of increasing returns to scale in production and constant returns to scale in the matching process. In anticipation of a particular solution to the wage bargaining problem, unmatched expected present value maximizing workers and employers respectively invest in search and recruiting effort that collectively determines the aggregate matching rate. An equilibrium is a dynamic path for the aggregate number of matches generated by best response investment decisions under rational expectations. There are no periodic solutions if the wage bargain is efficient and the future is discounted. However, when the difference between the elasticity of the matching rate with respect to aggregate search effort and the workers' share of match capital is small and positive, an endogenous cycle exists on an open set of small positive discount rates. The cycle can be either stable or unstable and is unstable if an only if the economy is sufficiently productive. Finally, when a cycle is consistent with initial conditions, an alternative non-periodic equilibrium also exists that yields a higher permanent income now and less unemployment in the future.
|Date of creation:||May 1991|
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|Contact details of provider:|| Postal: Center for Mathematical Studies in Economics and Management Science, Northwestern University, 580 Jacobs Center, 2001 Sheridan Road, Evanston, IL 60208-2014|
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- Kenneth Burdett & Nicholas M. Kiefer & Dale T. Mortensen & George R. Neumann, 1984. "Earnings, Unemployment, and the Allocation of Time Over Time," Review of Economic Studies, Oxford University Press, vol. 51(4), pages 559-578.
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- Peter Diamond & Drew Fudenberg, 1987.
"Rational Expectations Business Cycles in Search Equilibrium,"
465, Massachusetts Institute of Technology (MIT), Department of Economics.
- Diamond, Peter & Fudenberg, Drew, 1989. "Rational Expectations Business Cycles in Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 606-19, June.
- Fudenberg, Drew & Diamond, Peter, 1989. "Rational Expectations Business Cycles in Search Equilibrium," Scholarly Articles 3374509, Harvard University Department of Economics.
- Ricardo J. Caballero & Richard K. Lyons, 1989. "The Role of External Economies in U.S. Manufacturing," NBER Working Papers 3033, National Bureau of Economic Research, Inc.
- Oliver Jean Blanchard & Peter Diamond, 1989. "The Beveridge Curve," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 20(1), pages 1-76.
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