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 language | English |
|---|---|
| Article number | 110150 |
| Journal | Economics Letters |
| Volume | In Press |
| Early online date | 19 Nov 2021 |
| DOIs | |
| Publication status | E-pub ahead of print - 19 Nov 2021 |
Keywords
- Search and unemployment
- Adaptive learning
- Bounded rationality
- Business cycles
Access to Document
- Evans_2021_EL_BRUD_AAM
Copyright © 2021 Elsevier B.V. All rights reserved. This work has been made available online in accordance with publisher policies or with permission. Permission for further reuse of this content should be sought from the publisher or the rights holder. This is the author created accepted manuscript following peer review and may differ slightly from the final published version. The final published version of this work is available at https://doi.org/10.1016/j.econlet.2021.110150.