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Unemployment, Aggregate Demand, and the Distribution of Liquidity

Author

Listed:
  • Russell Wong

    (Federal Reserve Bank of Richmond)

  • Guillaume Rocheteau

    (University of California, Irvine)

  • Zachary Bethune

    (University of Virginia)

Abstract

We develop a New-Monetarist model of unemployment in which distributional considerations matter. Households who lack commitment are subject to both employment and expenditure risk. They self-insure by accumulating real balances and, possibly, claims on firms profits. The distribution of liquidity is endogenous and responds to idiosyncratic risks and monetary policy. Despite the ex-post heterogeneity our model can be solved in closed form in a variety of cases. We show the existence of an aggregate demand channel according to which the distribution of workers across employment states, and their incomes in those states, affects the distribution of liquid wealth and firms' profits. An increase in unemployment benefits or wages has a positive effect on aggregate demand and can lead to higher employment. Moreover, an increase in productivity has a multiplier effect on firms' revenue.

Suggested Citation

  • Russell Wong & Guillaume Rocheteau & Zachary Bethune, 2017. "Unemployment, Aggregate Demand, and the Distribution of Liquidity," 2017 Meeting Papers 760, Society for Economic Dynamics.
    • Handle: RePEc:red:sed017:760
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    References listed on IDEAS

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    Cited by:

    1. Ait Lahcen, Mohammed & Baughman, Garth & Rabinovich, Stanislav & van Buggenum, Hugo, 2022. "Nonlinear unemployment effects of the inflation tax," European Economic Review, Elsevier, vol. 148(C).
    2. Mohammed Ait Lahcen & Garth Baughman & Hugo van Buggenum, 2023. "Racial Unemployment Gaps and the Disparate Impact of the Inflation Tax," Opportunity and Inclusive Growth Institute Working Papers 073, Federal Reserve Bank of Minneapolis.

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