Shopping Externalities and Self-Fulfilling Unemployment Fluctuations / Greg Kaplan, Guido Menzio.

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Kaplan, Greg

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w18777.Publication details: Cambridge, Mass. National Bureau of Economic Research 2013.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: We propose a novel theory of self-fulfilling unemployment fluctuations. According to this theory, a firm hiring an additional worker creates positive external effects on other firms, as a worker has more income to spend and less time to search for low prices when he is employed than when he is unemployed. In response to the increase in demand and prices, other firms enter or increase their presence in the product market by hiring additional workers. We quantify the external effects of employment on demand and prices and show that they are sufficiently strong to generate multiple rational expectations equilibria and, hence, self-fulfilling economic fluctuations.

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February 2013.

We propose a novel theory of self-fulfilling unemployment fluctuations. According to this theory, a firm hiring an additional worker creates positive external effects on other firms, as a worker has more income to spend and less time to search for low prices when he is employed than when he is unemployed. In response to the increase in demand and prices, other firms enter or increase their presence in the product market by hiring additional workers. We quantify the external effects of employment on demand and prices and show that they are sufficiently strong to generate multiple rational expectations equilibria and, hence, self-fulfilling economic fluctuations.