Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/35911
Authors: 
Dufourt, Frédéric
Lloyd-Braga, Teresa
Modesto, Leonor
Year of Publication: 
2009
Series/Report no.: 
IZA Discussion Papers 4302
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.
Subjects: 
Unemployment fluctuations
sunspots equilibria
expected inflation
wage bargaining
JEL: 
J60
E32
E37
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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