Bounded rationality and unemployment dynamics

David Evans*, George W. Evans, Bruce McGough

*Corresponding author for this work

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    Abstract

    Using the bounded rationality implementation developed in Evans et al. (2021) , we consider unemployment dynamics driven by aggregate productivity shocks within a McCall-type labor-search model. We find that bounded rationality magnifies the impact effect of a decline in productivity on unemployment. Boundedly rational agents are overly pessimistic about wage offers during the course of a recession, resulting in higher unemployment relative to the rational model.
    Original languageEnglish
    Article number110150
    JournalEconomics Letters
    VolumeIn Press
    Early online date19 Nov 2021
    DOIs
    Publication statusE-pub ahead of print - 19 Nov 2021

    Keywords

    • Search and unemployment
    • Adaptive learning
    • Bounded rationality
    • Business cycles

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